Putin's Kleptocracy_Who Owns Russia?

by Karen Dawisha

  Putin’s good friend and Ozero neighbor Smirnov was involved in every step of the process. He received contracts signed by Putin; he was one of the directors of SPAG; and he was the head of the two subsidiaries of SPAG in Russia, Znamenskaya and Inform-Future, in both of which Kumarin was also involved.165 Kumarin and Smirnov, whose Rif-Security is said to have provided security for the properties of the Ozero Cooperative,166 were listed as lead developers of two real estate ventures supported by SPAG. The Tambovskaya Business Center, which became the Inform-Future Business Center (located on Tambovskaya str., 12), advertised itself as the first business center built to Western standards—“24 hour security, fiber optic telephone system, internet”—with three thousand square meters of rentable office space and client support.167

  The second property being developed by Znamenskaya was the Nevskiy International Center, on Nevskiy Prospect at Vosstaniya Square in a prime location across from the train station. Documents showed that the St. Petersburg city government loaned Znamenskaya 1.5 billion rubles to resettle residents of communal apartments occupying that building, but when Yakovlev became mayor, he came after Znamenskaya for not repaying the loan, leading journalists to conclude that Smirnov had not been obliged to repay the loan as long as Sobchak and Putin were in office.168 Kumarin confirmed that he had worked on the SPAG project and had worked to relocate the residents, but when he received the monopoly of the sale of gasoline in St. Petersburg (a monopoly granted by Putin), “we decided that we could make more money building gas stations, and I left the project.”169 The Nevskiy building stood empty for fifteen years, and yet SPAG company records show that SPAG continued to transfer funds to Znamenskaya for reconstruction of the building. Thus between October 1997 and July 2000 documents reproduced by Novaya gazeta show that 63.83 million Deutschmarks ($35 million) was transferred to Znamenskaya in twenty payments, over Smirnov’s signature. This was self-service in the extreme in that he was signing for SPAG as a member of the board, authorized by Putin to vote the city’s shares, and giving money to Znamenskaya, which he headed, for a project that was not being built.170

  Putin’s price for doing real estate deals generally was that 25 percent had to go into the city’s coffers for infrastructural and social projects, but there is no evidence of his seeking any commission for this deal. But since the city was itself a co-owner, and he had a position on the board, he certainly did not need to extract a commission as a means to gain access to profits. The BND reports about Putin and SPAG circulated widely. U.S. government analysis of SPAG found clear evidence of Putin’s involvement in money laundering, and in 2000, according to a Newsweek report, “U.S. officials . . . successfully lobbied for Russia to be placed on an international money-laundering blacklist. A key reason, said a former top U.S. official, was a sheaf of intelligence reports linking Putin to SPAG,” including reports showing he “signed important St. Petersburg city documents for the company’s benefit.”171

  The Ukrainian president Leonid Kuchma claimed he too was given the SPAG documents. (One can only speculate about why the BND would spread the good word about Putin at a time when its own investigations were reportedly stalling under political pressure at home as the new German chancellor Gerhard Schröder took office.)172 Kuchma then had to decide whether to turn them over to Putin, whose security chief, Nikolay Patrushev, was furiously trying to manage the fallout from Putin’s name being linked to criminal money-laundering charges in Germany. We know all this because Kuchma’s presidential guard famously made audio recordings that implicated Kuchma in many illegal actions, including the death of a journalist. But the recordings also reveal interesting details about Putin’s role in SPAG and, more important, the role of his security services in handling matters behind the scene. The first conversation, between Kuchma and his security chief Leonid Derkach, took place in Kyiv on June 2, 2000:

  Derkach: Leonid Danilovich [Kuchma]. We’ve got some interesting material here from the Germans. One of them has been arrested.

  Kuchma (reading aloud): Ritter, Rudolf Ritter.

  Derkach: Yes and about that affair, the drug smuggling. Here are the documents. They gave them all out. Here’s Vova Putin, too.

  Kuchma: There’s something about Putin there?

  Derkach: The Russians have already been buying everything up. Here are all the documents. We’re the only ones that still have them now. I think that [FSB chief] Nikolay Patrushev is coming from the 15th to the 17th. This will give him something to work with. This is what we’ll keep. They want to shove the whole affair under the carpet.173

  The second conversation took place two days later, when Kuchma and Derkach decided to keep the documents, clearly to use as leverage at some future time:

  Kuchma: The handover should only take place with the signature of Patrushev. This really is valuable material, isn’t it?

  Derkach: About Putin?

  Kuchma: About Putin.

  Derkach: Yes. There is some really valuable stuff. This really is a firm, which . . .

  Kuchma: No, tell me, should we give this to Putin, or should we just tell him that we have this material?

  Derkach: Yes, we could. But he’s going to be able to tell where we got the material from.

  Kuchma: I will say the security services; I will say that our security service has some interesting material.

  Derkach: And we should say that we got it from Germany, and that everything that exists is now in our hands. Otherwise, no one else has it, yes? Now, I got all the documents about Putin prepared to give them to you [Putin].

  Kuchma: Probably, if that’s necessary. I’m not saying that I will personally hand them over. Maybe you’ll give them to Patrushev?

  Derkach: No. I’ll just . . . when we make a decision we’ll have to hand them over anyhow because they’ve bought up all these documents throughout Europe and only the remaining ones are in our hands.

  Kuchma: Or perhaps I will say that we have documents, genuine facts from Germany. I won’t go into details.

  Derkach: Hmm.

  Kuchma: I will say, “Give your people the order to connect with our security service.” And when they get in touch with you, you say, “I gave it to the president, damn it. And I can’t get it from him now.”

  Derkach: Good.

  Kuchma: We need to play with this one.174

  In July 2001 two of SPAG’s founders, Eugene von Hoffer and Ritter, were indicted in Liechtenstein of money laundering and using shares in SPAG to scam foreign investors, including Americans—Ritter received one year probation and von Hoffer eight years on this and an additional charge.175 Meanwhile in Russia, Putin named Gref his economic development minister and Smirnov head of the Presidential Property Management Department and then director general of Tekhsnabeksport (Tenex), which is responsible for all Russian state exports of goods and services for the nuclear power industry, including the U.S.-Russian Megatons to Megawatts program and the building of the Bushehr nuclear reactor in Iran.176, XI

  Given the political sensitivity of the investigation, the Germans moved slowly and cautiously. German newspapers stated that Chancellor Schröder personally kept Putin informed about the investigation.178 Three years after Putin was elected president and his name had disappeared from the company’s roster, the Germans finally raided twenty-seven offices and banks associated with SPAG in Germany alone. Sources in the investigation said that the raids were “in connection with people who worked at [SPAG] in the ’90s” suspected of laundering “tens of millions of euros” for “one of the biggest and most powerful” Russian organized crime groups involved in “numerous crimes, including vehicle smuggling, human trafficking, alcohol smuggling, extortion and confidence trickstering.”179 Putin’s name did not appear in the indictments, and Ritter pled guilty on a lesser count. German observers concluded that as long as Schröder was chancellor, even at one point calling Putin a “flawless democrat,”180 Putin would not face another hostile investigation.181 Even more, intelligence experts claim that Sc
hröder handed Putin a BND file during his trip to Berlin on February 10, 2003, containing the results of a BND investigation into the company IWR, which had been involved in the disappearance of East German Communist Party funds prior to reunification. They found that Bank Menatep, owned by Mikhayl Khodorkovskiy, had possibly been involved, giving Putin the information needed to charge Menatep leaders with money laundering.182 Schröder was made head of the shareholders’ committee of Nord Stream within months of leaving office. Nord Stream was headed by Putin’s longtime friend, the ex-Stasi officer Matthias Warnig. Schröder and former Italian prime minister Silvio Berlusconi were the only Western leaders prominently present at Putin’s 2012 inauguration.

  The massive SPAG site at 114–6 Nevskiy Prospekt on Vosstaniya Square was renovated and then sold to the Finnish company Stockmann only in 2005,183 and a luxury mall opened there in 2010. In 2012 SPAG’s website still insisted that “the Company is the only Western company authorized to invest in real estate and development projects in key strategic areas of the municipality of St. Petersburg, northwestern Russia.”184 The stock’s volatility continued, as when, on February 1, 2007, the stock collapsed, plunging from 412 euros to 44 euros the next day, despite gains in the European markets. Investors rebelled, calling an emergency general meeting to prevent the board from using company funds to launch a legal defense.185

  As for Putin, his involvement in SPAG was public, and even leaving aside whether he benefited personally from his association, his presence on the advisory board had the multiple effect of allowing Russian money to flow into SPAG, attracting licit and illicit Western money through the surety of his association with the company, supporting the provision of properties for investment, and providing the use of St. Petersburg city funds for the relocation of residents. He resigned from his position on the board only on May 23, 2000, well after becoming president. German investigators did not pursue the link with Putin, and the case against him fizzled.

  Putin and the Petersburg Fuel Company

  As with Putin’s connection to SPAG, his involvement in the establishment of the Petersburg Fuel Company (Peterburgskaya Toplivnaya Kompaniya, PTK) features his tight circle of collaborators from the mayor’s office, organized crime, Ozero Cooperative members, and former KGB members. PTK was licensed by Putin in August 1994 when he was first deputy mayor. Vladimir Smirnov and Vladimir Kumarin were partners in the company, along with Vadim Glazkov, a Leningrad native who knew Putin from the KGB and the mayor’s office,186 and Viktor Khmarin,187 a St. Petersburg lawyer who was a friend of Putin and the brother of Putin’s first fiancée.188 Company records indicate that founding shares were held by twenty-one different companies and government agencies, including Bank Rossiya, the insurance company Rus’ (which included Arkadiy Krutikhin, the former head of the property management department of the Leningrad oblast’ committee, Vladislav Reznik, and Aleksey Aleksandrov—all of whom had also been involved in the founding in 1991 of Bank Rossiya), and both the St. Petersburg and Leningrad oblast’ committees for property management.189

  In January 1995 the city signed a series of agreements with PTK giving it the exclusive right to supply gasoline to the city’s entire fleet of vehicles, from ambulances to buses and cars,190 to build a chain of gasoline stations throughout the city, and to “participate in the formulation of policies of the St. Petersburg Mayor’s Office in the area of [gasoline] supply.”191 Russian media sources reported that the PTK brought together the city administration and the Tambov and Malyshev criminal groups.192 Il’ya Traber, who controlled both the antiquarian market in the city and held a major interest in the St. Petersburg port, also was involved, and the Tambovs’ Kumarin returned to Petersburg in early 1996 after being badly wounded in a turf battle there. It appears this was one area where rival groups ultimately cooperated for their mutual benefit, which allowed them to fix prices, evade taxation, and skim deliveries,193 against the interests of St. Petersburg citizens who suffered from higher prices and poorer quality. In this way the city administration allowed itself to be captured by criminal elements, presumably as in such cases worldwide, for their mutual benefit. Thane Gustafson, whose book Wheel of Fortune provides an extensive study of Russian oil, summed up the political forces at work in St. Petersburg: “The local fuels business was a rich source of off-the-books cash, and therefore it was quickly penetrated by organized crime, typically with the behind-the-scenes backing of city officials and local law-enforcement agencies.”194 The Russian investigative reporter Roman Shleynov states:

  The PTK was the nexus of the interests of those described as members of the Tambov group and the pool of Vladimir Putin’s cronies who today control the country’s key assets. At the time the PTK was set up in 1994, the shareholders included Bank Rossiya, whose co-owners were [Putin’s] long-time cronies, who had founded the Ozero cooperative together with him: Yuriy Koval’chuk and Nikolay Shamalov. Interestingly, Gennadiy Petrov, who has since been arrested in Spain, was a shareholder of Bank Rossiya in 1998–1999. Another shareholder in PTK was the Piter Information and Legal Office, in which Il’ya Traber had a stake. The structure of PTK’s assets and management had changed by 1998. According to the company’s records, another mate of Putin’s, Vladimir Smirnov (co-founder of the Ozero cooperative) became chairman of the Board of Directors, while Vladimir Kumarin, who is now under investigation, became a vice president.195, XII

  Novaya gazeta’s investigative reporter Roman Anin concluded in 2011, “Although the city’s Property Management Committee had the biggest (14%) stake in the PTK, if the shares owned through various entities by Gennadiy Petrov, through various structures together with Vladimir Kumarin (even though Kumarin was not officially a shareholder) are aggregated, they owned the petrol monopoly, which enjoyed serious protection from the St. Petersburg mayor’s office and Vladimir Putin himself.”197

  This group held wide sway in St. Petersburg while Putin worked there and after he left. To be sure, it might not have been possible to establish a more competitive market given the propensity by rival groups to use violence. It is, however, notable that the city authorities, including Putin, worked with, strengthened, and ultimately legitimized the crime families in their midst. It is not surprising that Kumarin was not arrested in Russia until after Petrov was under arrest without bail in Spain in 2008.XIII Spanish officials told the U.S. Embassy that their extensive phone taps and seized documents led them to the conclusion that Russia had become a “virtual mafia state.” There were two reasons to worry about the Russian mafia, they said. One was its “tremendous control” over certain strategic sectors, like aluminum. “The second reason is the unanswered question regarding the extent to which Russian PM Putin is implicated in the Russian mafia and whether he controls the mafia’s actions. Grinda [José Grinda González, the chief Spanish prosecutor in charge of the case] cited a ‘thesis’ . . . that the Russian intelligence and security services . . . control OC [organized crime] in Russia. Grinda stated that he believes this thesis is accurate.”200

  Kumarin was finally arrested in Russia in 2007 and in November 2009 received a fourteen-year sentence for fraud and money laundering, having presided as head of one of the last remaining organized crime groups in St. Petersburg for the first two Putin terms. Some reports concluded that the Russians wanted to demonstrate to the Spanish officials that they were going to get tough on organized crime by actually imprisoning him. The thinking was that this paved the way for Petrov and Malyshev to be freed on bail in February 2010, allowing them to return to their Majorca villas.201 Others contend that Kumarin had lost a battle for market share against a government minister.202

  The tight connection between Putin, his Ozero friends, his KGB collaborators, and the criminal world was significantly illustrated in the PTK case. Boris Gryzlov, who had come from Petersburg with Putin and was his first interior minister, confirmed the relationship between PTK and Tambov when he stated in 2001 that whole sectors of the economy in St. Petersburg during this period were
under the control of organized crime, including commercial seaports in the northwest, the fuel and energy complex, and timber exports.203

  Putin and Twentieth Trust: Another Criminal Case

  When discussing what personal use Putin himself made of the funds that went into the city’s coffers, most often at the top of the list is Criminal Case No. 144128, relating to the investigation initiated by the Ministry of Internal Affairs’ Investigative Committee on February 4, 1999.XIV The case charged Putin with authorizing the transfer in the early 1990s of almost 23 billion rubles (almost $28 million) from the city budget to Twentieth Trust as advances and loans that were never paid back.204 According to Lieutenant Colonel Zykov, the investigation concluded that “the Corporation, as a commercial firm, was receiving loans from the city, through channels and from special funds on favorable terms, it did not return them; it put the money into deposit accounts at commercial banks; it was then rerouted to other companies for purposes not related to the original submission; and it charged for other frivolous expenses.”205

  The Twentieth Trust was registered on October 20, 1992, by Putin’s Committee for Foreign Liaison as a company devoted to “construction, reconstruction and repair of industrial, domestic and cultural sites in Russia and abroad.”206 In 1993 alone, Zykov claimed, the Trust had a budget of over $4.5 million and received about 80 percent of its funds from the city of St. Petersburg, even though it was a private company and not a public corporation that needed to meet a payroll, like many others that received public assistance at the time.207