Nightmare in Boomtown
Mark Seidenfeld was just another American cashing in on the post-Soviet boom. Then one bad deal in Kazakhstan sent his life into a spiral of extortion, siberian prison, and frontier justice. A cautionary tale.
As he watched the wind-scarred steppe of eastern Siberia scroll by the car, Mark Seidenfeld couldn't resist cracking a grin. Last night's vodka was still coursing through him, swirling with the high of yet another triumph. Newly appointed as the director of mergers and acquisitions for Golden Telecom, a U.S. firm based in Moscow, he had been sent along with two colleagues to Blagoveshchensk, a river port city of 200,000 on the Russian-Chinese border, to investigate a $2 million telecom outfit and see if it was worth buying. It was a perfunctory trip with a modest return, assuming the deal went through at all. But while in town, Seidenfeld had discovered two other companies that might be worth scooping up, and now he was looking at a possible $15 million deal. That morning, Seidenfeld had sat braced against the subzero cold in his sheepskin jacket and chatted with the town's deputy mayor. He was heading home to Moscow to relay the good news to his bosses. And soon he would be back in the cozy apartment he shared with his Russian fiancée, Natiya, who is 11 years his junior; in two weeks, they'd go on a lavish vacation in Spain. It was December 7, 2005. Life was good.
Seidenfeld, a native of Monsey, New York, who was then 37 years old, had been working in the former Soviet states for 12 years. During that time, he had learned an important Russian business maxim: "It is better to ask for forgiveness than permission." Seidenfeld had sailed close to the wind more than once, thrown in among people who were more gangsters than businessmen. That fact was made plain to him when one of his partners was shot dead, point-blank, in Moscow in 1997. But Seidenfeld himself had managed to thrive. He wasn't bulletproof, but he was proving clever and tough enough to stay in the game, and keep winning.
As he checked in for the flight to Moscow, though, something was wrong. The woman behind the counter eyed him suspiciously. Then a Russian police official in a sky-blue greatcoat and a massive Soviet-era cap stepped up and led him away to a room behind the check-in desk where a plainclothes detective sat waiting. Within hours, Seidenfeld was locked in a tiny, unheated cell in a detention center just across the Amur River from China. That night, terrified, he shivered under a coarse blanket as the temperature outside dropped to minus-20. At 5-foot-8, with a slight paunch from too many client dinners, he was a soft target for the thugs who surrounded him. His cockiness evaporated.
A few days later, Seidenfeld was taken to a holding cell at a local court. There he learned he was being charged with embezzling $43,000 from a company called Arna, in Almaty, Kazakhstan, where he had been CEO from 2002 to 2004; the Kazakh authorities wanted him back to face trial. So began a treacherous 19-month slog through the morass of the post-Soviet justice system. Seidenfeld would face extortion attempts, corrupt cops, fabricated evidence, and the wrath of a Kazakh tycoon. It was a nightmare scenario come to life--and a stark example of the perils of frontier capitalism.
Kazakhstan was once the boneyard of the Soviet Union. Its sprawling plains were home to Stalin's labor camps and later became the principal nuclear test site for the Soviets. In 1991, with the collapse of communism, Kazakhstan was the last of the Soviet states to declare independence. The country has rarely made the news since--unless you count the movie Borat, which lampooned the place as an inbred, anti-Semitic, goat-herding backwater where the town rapist is just another lovable rogue.
In reality, Kazakhstan has been riding a free-market boom of a magnitude few countries have ever seen, buoyed along on its elephantine oil reserves--the Tengiz, Kashagan, and Karachaganak oil fields. Unlike neighboring Uzbekistan, which has a history of shunning foreign investment, Kazakhstan embraced it early on, and U.S. firms promptly saddled up for a new gold rush in the wild, wild East, with oil companies such as Chevron carrying the flag. After Big Oil came power giant AES, which alone invested more than $200 million, and about 100 other companies: Citigroup, Hewlett-Packard, Nestlé, Philip Morris, Procter & Gamble. Some $46 billion of foreign investment has since been sunk into the republic, including about $15 billion from the United States, making this country Kazakhstan's biggest foreign investor.
For a while, the U.S. presence in Kazakhstan was a win-win for both countries. But times change. As the Kazakhs found their economy increasingly controlled by outsiders (and increasingly successful), they moved to reclaim it--by any means necessary. According to Transparency International, a Berlin-based monitoring group, Kazakhstan rates 111th on the 2006 Transparency International Perceptions Index. That's behind Colombia, Libya, and Syria. "Foreign investment in virtually all sectors is restricted by exclusive barriers," says a report from the Heritage Foundation's Index of Economic Freedom. "Government policy actively favors domestic businesses, and the weak rule of law allows for significant corruption and insecure property rights." According to the report "Doing Business in Kazakhstan," produced by the U.S. Commercial Service in Almaty, there are "frequent harassments by local and national 'financial police' and other taxation authorities through generally intrusive inspections. Quite often, these cases with the tax authorities lead to criminal charges by local governmental officials as a pressure tactic."
Amid this culture of corruption, foreign investors--especially those on the ground--have been forced to walk an increasingly vague and hazardous line. And those expecting Washington to step in to referee are missing a larger reality. American strategic interests--not only Kazakhstan's oil reserves but also its geographic position between China, Russia, and the Middle East--have drawn the U.S. government into its own set of compromises. We need Kazakhstan, the official line runs, and the country's current regime--like those in Saudi Arabia, Pakistan, and any number of other dodgy strategic partners--has proven "cooperative" on issues such as terrorism and nuclear weapons.
In other words, to cement its influence in Kazakhstan, Washington has been forced into a delicate balancing act that requires tacit approval, or at least some tolerance, of systemic corruption. Witness the case of James Giffen, once an adviser to Kazakhstan's president Nursultan Nazarbayev and the former CEO of Mercator, a small New York-based merchant bank. Giffen, who was the model for the "Mr. Kazakhstan" character in the film Syriana, was due in Manhattan's Federal District Court last month to face charges of money laundering, wire fraud, and breaching the Foreign Corrupt Practices Act. Specifically, the case alleges he paid more than $78 million in bribes to the Kazakh president and the former oil and gas minister to secure contracts in the Tengiz oil fields for BP, Chevron, ConocoPhillips, and ExxonMobil. He is accused of creating Swiss bank accounts with which to pay tuition at exclusive boarding schools for family members of Kazakh officials, and to buy speedboats, fur coats, jewelry, and other lavish gifts for the president and his family.
"Kazakhgate" is the largest foreign bribery suit ever brought against an American citizen. Giffen's lawyers contend he was acting with the full approval of the U.S. government, and with the encouragement of senior officials at the CIA, the State Department, and even the White House. Citing national-security interests, the government has refused to declassify documents the defense says would establish the connection, despite pressure from the judge.
As the months passed after his arrest, Seidenfeld came to the creeping realization that he'd been hung out to dry. The State Department had done next to nothing to get him sprung, despite pleas for help to the consulate. Weighed against Washington's other regional priorities, a small-time telecom executive, American or not, didn't add up to much. As one local businessman told me, Seidenfeld was a "nobody."
The irony, Seidenfeld says, is that his real "crime" was trying to conduct an honest, transparent transaction. He had tried to sell a controlling stake in Arna in a public auction to the highest bidder, riling the company's sole Kazakh shareholder, Murat Zhunussov. Zhunussov did ultimately take control of the firm but not at the knockdown price he was pushing for. Seidenfeld's refusal to cut a sweetheart deal cost the Kazakh about $5 million. "I had no idea the lengths he would go to get me for that," says Seidenfeld.
A few weeks after Seidenfeld's arrest, his local attorneys relayed a message from a Kazakh lawyer for Zhunussov, who said he could have Seidenfeld freed if he paid a ransom of $5 million, either in cash or by buying grossly inflated shares in Arna. "If I didn't, they said I would be held indefinitely," Seidenfeld says. "But I just didn't have that sort of money." A lesser offer of $3 million came through a few months later. Then the price dropped to $1 million. Seidenfeld didn't have the cash. He remained in jail.
In October 2006, after 11 months in Siberia, Seidenfeld was loaded aboard a prison train to be extradited from Russia to Kazakhstan. For 32 days, he was stuffed into a 3½-foot-by-7-foot cell in a boxcar with one toilet for 60 convicts. His fiancée, Natiya, doggedly followed the train on its 3,000-mile journey, intercepting it as it stopped at detention centers. Word of the presence of a wealthy Western businessman had traveled fast among the prisoners, and Seidenfeld learned early on the importance of isolating himself as much as possible. Natiya secured lawyers wherever the train stopped, bribed officials, and did whatever she could to make sure Seidenfeld traveled in his own cell. He kept his head down while shuffling to and from different prison stops to avoid the batons of the more-sadistic guards. "If I had been kept with the rest of the population, I might not be around today," he says.
Seidenfeld arrived back in Almaty in a juddering Soviet prison truck. In the city where just two years before he'd lived the high life of a corporate executive, he now took up residence at Institution LA 155, a broken-down building east of town with a cracked roof and a rusty blue gate.
Outside the walls of Seidenfeld's prison, a Central Asian answer to Dubai is fast rising from the steppe. The smell of wet concrete coats the streets of Almaty as migrant Uzbek crews erect the city's countless mirrored towers, their facades muscling up at sunset to remake the dreary Soviet-era skyline. Real-estate prices here have shot from $150 a square foot in 1995 to close to $900 today; in the posh neighborhood where the velvety foothills become the mountains of Tien Shan, a basic four bedroom runs upward of $3 million. Aston Martins, Ferraris, and Benzes are everywhere, reflecting the neon-lit windows of Chanel and Armani as they slide past. (Never mind that the roads peter out a few miles beyond the city, impassable in anything less than a 4x4.) A table at Cristobal nightclub will cost you $1,000; a standard room at the Hyatt, $450 a night. As one American businessman says flatly: "You won't find any losers here. The losers have to go home."
If there were ever any real rules for business in Almaty, the city's cash-crazed culture devoured them as fast as they were written. "A small- to medium-size company coming here will have to break the law left, right, and center," says Nicholas Levenetz, director of sales and marketing at the real-estate company Scott Holland. "It's impossible to stay clean. Some people like to jump out of airplanes to get a high; I like doing business here on any given day. Just don't ask anyone how they made their first million."
Secrecy and fear seep into every aspect of business life here, and few are willing to put their heads above the parapet to talk. "Kazakhstan is one of the most difficult operating environments on the planet," says an oil executive I'll call Brian, who says he was nearly forced to hand over his company to local government officials. "It's all a big sucker punch. They bring you in close so that they can bleed you, punch and kick you, and take what you have. It's gangster capitalism. If you build a business that makes money, then the vampires come. And you have to have repellent." When Brian refused to cooperate, he says, "some guys tried to poison me. I slept with a loaded shotgun under my bed. I had a Kalashnikov with three clips in my car and an RPG by my bed for a month." He says he managed to escape with his firm only after counterattacking with a platoon of lawyers who cost him millions. "If you are not in a position to defend yourself," he says, "you will get fucked. Period."
"You won't find any losers here. The losers have to go home."
Seidenfeld himself acknowledges it was impossible to operate without paying bribes. "Everyone has his hand out," he says. "It takes up a lot of time for anyone doing business in this part of the world." He explains: "No one says, 'Give me a bribe.' How it works is that the fire department comes around and says it will get all sorts of anonymous tips that it will have to come and investigate. That could really disrupt your workflow. If you get the tax people, it's even worse. They can tie up your accounting staff anywhere from a week to two months."
Mark "Menachem" Seidenfeld originally came to Russia in 1991 with his wife, Dvorah, and their two young children--not to make a fortune but as a newly ordained rabbi. He was an ambitious, confident young man who wore his black hat at a rakish angle and felt a missionary urge to return the faithful to the fold after Judaism's ban under the Communists. "He was such a good, holy person," says Dvorah. "He was well liked. And he had this beautiful singing voice; he was a cantor."
Technology, as well as the Torah, had long fascinated Seidenfeld, and when it became clear that performing circumcisions and teaching scripture weren't going to provide much of a living, he began moonlighting selling calling cards. He ran the operation from his dining- room table with Dvorah and quickly found he had a flair for business. In 1995, he cofounded a telephone company, Corbina, which grossed more than $150,000 in the first six months.
Soon enough, Seidenfeld, like Russia, began to change with the times. Even as the Russians were throwing off their old oppressions, Seidenfeld was sloughing off his orthodoxy, drawn to the many charms of the marketplace. And as he drifted away from his rabbinical work, he started moving in some shady circles. "In Moscow, he fell in with a bad crowd," says Dvorah. "He was going to bars and strip clubs. It all went to his head." In 1996, he left Corbina after a falling out with his partner and started Westcall, another telephone and Internet company, with offices in both Moscow and St. Petersburg. It was an immediate success, but plunged him still further into the seamy side of the city. In the summer of 1997, one of Seidenfeld's partners, Andre Yurievic, was murdered in broad daylight as he stepped out of an elevator. The killing was never solved; Seidenfeld won't talk about it.
"Mark freaked out," Dvorah says. Seidenfeld had a friend drive him to the airport with a security guard early one morning a few days later. He fled to New York. "He was so scared," she says. "I wasn't supposed to say anything to anybody." A few days later, she and the children (now five of them) left to stay with her mother in Israel. The family reconnected when Mark took a position in Belgium, but by then the marriage was falling apart. The allure of life as a single executive eventually won out. The couple split in 2000 and ultimately divorced.
In January 2002, Seidenfeld signed on as general director of Arna. The Kazakhstan telecom market at the time was exploding: 20% annual growth, projected to be worth $10 billion by 2010. Arna was a bloated, inefficient company when Seidenfeld came on board, and he attacked its problems with the same gusto he had brought to his early work as a rabbi.
The company's ownership was split two ways: 83% was held by a fund run by Eagle Venture Partners--a joint operation of the European Bank for Reconstruction and Development (EBRD) and Belgian investment bank GIMV--and 17% by Murat Zhunussov. At the time, Zhunussov was known to Seidenfeld only as a crucial local partner. By tradition, all foreign-owned businesses in Kazakhstan need an investor from inside the country, a sort of consigliere. The idea is that only a local can navigate the bureaucracy, bribe the right people, and stave off the predatory forces outside. In reality, the arrangement often aids the corruption and opens a back door into company coffers.
Zhunussov was aggressively carving a place for himself in the newly privatized Kazakhstan. A debonair figure in fine European suits, he drove a bright red Porsche, lifted weights, practiced jujitsu, and gambled avidly. He also boasted excellent connections within the government, including to President Nazarbayev's daughter, Dariga, who was married to Rakhat Aliyev, then one of the most feared and powerful men in the country. Short but heavily muscled, Aliyev inspires such terror that people are afraid to talk about him in public. He officially held senior government positions in the committee for national security and the ministry of foreign affairs, yet it was widely believed that he amassed his fortune by seizing companies and extorting businesspeople. (He has since left the country after being charged with abducting two Kazakh bankers who allegedly crossed him.) Aliyev's primary tool was the national financial police, a corps of 100 elite officers that reported to him. It was the financial police who eventually brought the charges against Seidenfeld and arranged for his arrest.
The warning signs were everywhere. Seidenfeld's British predecessor at Arna, Stephen Hobson, had left the country after angering Zhunussov, escorted to the airport under armed guard, terrified. But Seidenfeld plunged ahead. He fired staff and brought in new workers. He updated billing systems. He was fascinated with VoIP technology and installed phone lines everywhere from the American embassy to Kazakh government offices. Within two years, Arna was the second biggest broadband provider in Almaty, and the company's revenue had doubled.
Even though Seidenfeld was doing well, he was making enemies. "Mark used to fly by the seat of his pants," says John Ward, a member of Arna's board of directors. "He wasn't world-wise sometimes. He got the company humming, but he was out of his head." Zhunussov, in particular, grew increasingly annoyed with Seidenfeld's meddling, not to mention his growing savvy in the venal ways of Kazakh business. The American was making him look increasingly dispensable. Zhunussov was being paid $10,000 a month as a "consultancy" fee, and everyone knew it was a sinecure; he didn't even attend board meetings.
In October 2002, Seidenfeld called Zhunussov into his office for what would be a fateful meeting. The board had voted to end Zhunussov's consultancy and Seidenfeld was to deliver the message. Not only would Zhunussov no longer receive his fee, Seidenfeld told him, but he would lose access to company cars and telephones as soon as his contract expired at the end of the year. As Seidenfeld tells it, Zhunussov blew up: "You don't know all the work I do behind the scenes," the Kazakh said. "You'll never be able to run this company without me. You're going to have major problems that you never expected."
Roughly a year later, the revenge started. Zhunussov filed a complaint with the board, claiming Seidenfeld had taken a $43,000 "personal loan" from Arna and never repaid it. An internal investigation began immediately, and in February 2004, a PricewaterhouseCoopers audit found the claim baseless.
In the meantime, the Eagle Fund decided to sell its 83% stake in Arna, and Seidenfeld found British, Pakistani, and Russian bidders willing to pay north of $20 million. Zhunussov, who still owned 17% of the company, wanted to buy the controlling shares himself, and he wanted to pay $10 million for them. He threatened to do everything in his power to block any deals with outsiders, and eventually the board threw up its hands and sold the fund's stake to him, on March 3, 2004, for $15 million. It was $5 million more than he wanted to pay, and he held Seidenfeld responsible.
Immediately after the sale, Seidenfeld was fired. Two weeks later, the financial police issued allegations that he had billed the company $43,000 for calling- card equipment he never actually bought--and that he pocketed the money. Eighteen months later, Seidenfeld was sitting in prison in Siberia.
How much does it cost in Kazakhstan to have a man thrown in jail under false charges? "A couple of hundred thousand dollars," says one foreign investor in Almaty who agreed to talk to me anonymously. "Then you pay more to keep the misery going."
Pale and downcast, Seidenfeld arrived in cuffs at the Almalinsky regional court on a steamy mid-June day this year. Two prosecutors in bad suits sat behind a chipboard table. Seidenfeld's ex-wife, Dvorah, took a place in the back of the courtroom, where she quietly recited scripture and shot occasional glares at his fiancée, Natiya. The judge, Zaure Keikebasova, a fortyish woman in flowing maroon robes, flashed a smile at the Fast Company photographer. "Will I look good in the magazine?" she inquired.
The prosecutors, led by a ruby-faced man with a large mustache, fidgeted when it came time to ask questions, and at the end of each day they sauntered to a shiny black Range Rover parked opposite the court and sped off, puffing heavily on cigarettes.
"God is punishing him," she told me. "Mark! God wants you to wake up!"
The original embezzlement charges had been dropped while Seidenfeld was in prison (the supposedly nonexistent calling-card equipment had been in the office all along), but a whole new set of charges was quickly cooked up--this time alleging that he had overpaid for the equipment and kept the difference, about $26,000. As the trial proceeded, some prosecution witnesses seemed to get the old and new charges confused. And then some of the key players on the prosecution side just didn't show up. Zhunussov was subpoenaed, but he was away running a marathon in China, the prosecutors said, and then later vacationing at his holiday home in Kyrgyzstan.
The prosecution's case continued to unravel. "What did you think of the company having two sets of books?" a financial-police investigator asked former board member John Ward at one point. "As the company didn't have two sets of books," Ward replied, "I can't see how I can feel anything about it."
Seidenfeld rested his chin on his chest and closed his eyes. It was a farce.
"It's a Wild West atmosphere. You can't come in with U.S. or U.K. rules."
One day, Dvorah confronted Natiya outside the courtroom. "You witch! You home wrecker!" she yelled, and hurled dog-eared photographs of herself with the children on the ground. She later testified with a scathing account of her ex-husband's character, claiming he hadn't paid child support and had no interest in his family. I had been approached by Dvorah and an emissary from Zhunussov one night before the trial in the lobby of the Intercontinental Hotel, and she had thrown the same photos at my feet. "God is punishing him," she told me. "Mark! God wants you to wake up! We can only mourn the person he was." Zhunussov's messenger smiled at me. "Look at this woman," he said. "She has been abandoned. But Mr. Zhunussov is a family man. When the time is right to collect on this guy, she will get her money before Mr. Zhunussov takes anything." I asked Dvorah who had paid for her ticket here, and the man quickly interjected and said it was an "anonymous donor." He ended on an ominous note: "There are consequences if you cross the wrong person here."
In the end, Seidenfeld was helped by the U.S. government, but not in a way anyone might have expected. His supporters had been stunned by the apparent reluctance of U.S. ambassador to Kazakhstan John Ordway to help an American citizen in distress. The ambassador had met with the Kazakh general prosecutor, but nothing had come of it. Beyond that, he sent Seidenfeld a few magazines and some energy bars in prison. And with that, apparently, his work was complete: "We have done everything possible," Ordway told Seidenfeld's supporters in a letter. He refused to give an interview to a reporter from the Las Vegas Sun, saying he didn't "do telephone interviews." When Fast Company offered to fly me to the capital, Astana, to visit him personally, he refused that, too.
A former State Department consultant, speaking on condition of anonymity, hinted at why: The United States sees Kazakhstan as a play-at-your-own-risk market. "I know a ton of people who have made a ton of money in Kazakhstan, but none of them have been straight arrows all the way through," she says. "It's a Wild West atmosphere. You can't come in with U.S. or U.K. rules and live for five or six years and make money and not understand how business is done. It probably is an open-and-shut case of injustice, but it's not like this person didn't know the risk. These small-venture people, when they have success, are playing complicated games. And when they run out of options, they say, 'I am an American.'"
Help came from Nevada, of all places. For three months in 2004, after being fired from Arna but before returning to Moscow to work for Golden Telecom, Seidenfeld had lived in Las Vegas. This was enough to make him a constituent of congresswoman Shelley Berkley, who took up his cause and began pressuring Kazakh secretary of state Kanat Saudabayev. The Kazakhs were exploring the idea of getting into the casino business and had sought investment from Vegas. Berkley made it clear that any potential deals could be affected if her constituent didn't get a fair trial. "A poor adjudication would have provocative consequences for the future of investment in Kazakhstan," Berkley told me. She scheduled a trip to Kazakhstan to coincide with the trial, and she and Senate majority leader Harry Reid sent a letter to Ordway urging him to monitor the case closely. When President Nazarbayev visited the White House, Berkley mentioned the case to him.
On July 11, Judge Keikebasova returned a not-guilty verdict. Natiya broke down in tears. The judge excoriated the prosecution for 45 minutes, slamming the credibility of their witnesses and saying Seidenfeld was entitled to "moral compensation."
Seidenfeld largely credits Berkley with his acquittal. "The pressure must have trickled down," he says. "The message came down from on high that this was to be a fair trial, to be done objectively and honestly, with no games. At that point, law-enforcement agencies in Kazakhstan lost confidence in their ability to put away an innocent person." That Berkley's involvement in the case could also benefit her other, more-powerful constituents--the casinos--went without question. And in the weeks after the trial, rumors circulated in the diplomatic community that the Kazakhs had gone easy on Seidenfeld in the interest of trying to make the Giffen trial in Manhattan go quietly away. But if Seidenfeld had become a pawn, he didn't seem to mind.
In the courtroom, Natiya and Seidenfeld ran to each other and embraced, a year and a half after he left their Moscow apartment for Siberia. But Seidenfeld's ordeal didn't seem to have planted any doubts about the future. "I'm looking forward to getting back to business," he said.
Seidenfeld still had to face an appeal by the prosecution: no double-jeopardy rule in Kazakhstan. But a month after the original trial, the court's decision was upheld. Just as Seidenfeld was heaving a sigh of relief, though, prosecutors dredged up yet another charge--that he had failed to disclose a $1.2 million company debt to KazakhTelecom. There seemed to be no escape. Seidenfeld decided that he had to flee, so he packed himself into a Mercedes at midnight September 10 and drove to Kyrgyzstan. From Bishkek, he caught a last-minute flight to Istanbul, then connected to JFK. At 4 p.m. on a bright, end-of-summer afternoon, he arrived back on American soil, slightly disheveled and with dark hemispheres under his eyes--but free. He plans to return to his job in Moscow at Golden Telecom.
Back in Almaty, Murat Zhunussov is carrying on business as usual. He is trying to sell Arna (now renamed Ducat) for more than $50 million.