Putin's Kleptocracy_Who Owns Russia?
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Sergey Kolesnikov, on far right, with Nikolay Shamalov and Dmitriy Gorelov (center left and center right), whom he accused of using profits from state projects to help build a mansion later dubbed “Putin’s palace.” http://www.reuters.com/investigates/russia/#article/part1
Among Putin’s new circle were Sergey Kolesnikov and Dmitriy Gorelov, the owners of Petromed, the Petersburg-based medical supplies company established in the early 1990s, and Nikolay Shamalov, who was an Ozero Cooperative cofounder and the representative in northwestern Russia of Siemens, the giant German conglomerate. Since Putin had a relationship with Petromed in the 1990s and this relationship flourished and grew in the 2000s, analyzing it provides a window into the way the Putin Kremlin has functioned.
Putin’s Committee for Foreign Liaison had been a 51 percent co-owner of Petromed almost from the beginning, but the city government had withdrawn its support once Putin left for Moscow. Having established themselves with Petromed, Gorelov and Kolesnikov became major shareholders in Bank Rossiya as well as the Vyborg shipyards. Now that he was president, Putin wanted to work once again with Petromed and Shamalov, this time on a nationwide scale.
Kolesnikov subsequently left the country and became a whistleblower about Kremlin corruption, writing an open letter to President Medvedev asking him to intervene to stop the massive corruption that he maintains had led to the diversion of funds to build Putin a $1 billion palace in the south of the country. The story, which broke in the Washington Post,94 went viral, as workers at the palace site also posted extensive images of the almost-finished construction, replete with pictures of a gilded double-headed eagle, the Russian state emblem, over the entry gates, and a worker sitting in what appears to be a replica of the presidential office.VIII
Russian and Western journalists took the investigation further, seeing the palace as a tangible sign of Putin’s “crony capitalism.” Kolesnikov provided extensive documents purporting to show how the scheme functioned. He explained that 2000 was a decisive year: early that year, Shamalov came to Petromed “with the offer from . . . Putin to provide funding for a number of major contracts in the field of public health. . . . Shamalov said that Putin had summoned him to his home to discuss certain business opportunities related to the fact that he, Putin, had become president. As Shamalov told Kolesnikov and Gorelov, the condition of the funding for these contracts which Putin was awarding was that 35% of the contract amount be put in foreign accounts. We were told that these contracts would be financed by oligarchs ready to make donations to the new president. The money accumulated in foreign accounts would come back and be invested in the Russian economy under the direct supervision of Putin.”96 They agreed—after all, in their understanding of the scheme, the money was coming not from the Russian state but from oligarchs who were told this would be the price of doing business from here on out. And the money was going to be rerouted for much-needed projects in Russia. According to the contract provided by Kolesnikov,IX Roman Abramovich was the first one asked; he pledged $203 million for the renovation of the Military Medical Academy in St. Petersburg but sought reassurances that the money would be used only for this purpose. Kolesnikov asked Abramovich directly whether Putin was behind this scheme, and Abramovich confirmed that the money had indeed been “donated” by him “on request.”97 Kolesnikov stated that Abramovich had himself confirmed the 35 percent rate with Putin, whom they referred to as “Mikhayl Ivanovich” among themselves.98, X
“Putin’s Palace,” featuring the front gates with double-headed eagle; aerial photograph; map showing three helicopter landing sites, two security stations, a radio tower, enclosing walls, sports center, amphitheater, main building and elevators to the sea; and a worker sitting in the office. Source: RuLeaks.net
According to investigations by the Financial Times in 2012 and Reuters in 2014, equipment for the renovation was bought from Siemens, with Shamalov as its representative, through U.K.-registered companies. The intermediary companies were co-owned directly or indirectly by Kolesnikov, Gorelov, and Shamalov. Equipment was sold by Siemens to the intermediary companies, where, according to Kolesnikov, “profits could be made,” and only then delivered to Petromed, owned by Gorelov and Kolesnikov.103 As was the case with intermediary companies in the gas industry, normally the existence of such companies suggests there is profit skimming all along the way. Kolesnikov claims that despite Abramovich’s efforts to ensure transparency, providing funds only with the proper invoices from Siemens, $85 million nevertheless went to offshore companies. Kolesnikov insisted that these weren’t kickbacks—“We were just able to buy for lower than the price list”—that they were taking advantage of deep discounts by the suppliers, but evidently they did not return to Abramovich the difference between the list price and the supplied price.104 Since Siemens ultimately admitted to making corrupt payments to Russian officials for the purchase of medical devices, it appears that in order to achieve and maintain market share, Siemens was additionally willing to pay bribes.XI According to bank transfers provided by Kolesnikov, in February 2002 EM&PS, a UK-domiciled company co-owned by Kolesnikov, Gorelov and Shamalov, transferred $85 million to Rollins International, registered in the British Virgin Islands. Kolesnikov claims that Gorelov and Shamalov used the money to buy a 12.6 percent stake in Bank Rossiya, but not before Rollins paid dividends on their investments of $22.3 million for Gorelov and $21.8 million for Shamalov, according to copies of the payments also referenced by the Financial Times.106 Kolesnikov estimated that by 2007 almost $500 million had been gathered abroad just in Petromed-related offshore companies run by Shamalov, drawn from donors who were essentially paying tribute to Putin in return for being allowed to do business in Russia.107 While this Petromed-related money was used also to fund development projects, and since it came from oligarchs who had paid their taxes, Kolesnikov had no principled objection to it until the money began being diverted for “Putin’s Palace.”
Cash Flow Scheme
Source: Sergey Kolesnikov
Note: OAO AB Rossiya is Bank Rossiya, and Dresden Bank, Switzerland Ltd., is Dresdner Bank.
Kolesnikov’s documents indicated there were transfers from Rollins into another offshore company called Rosinvest. He alleged that Rosinvest “was set up in 2005 on Vladimir Putin’s instructions conveyed through his friend Nikolay Shamalov.”108 Kolesnikov claimed that Putin owned 94 percent of the shares, and Shamalov, Gorelov, and Kolesnikov owned 2 percent each—all in bearer shares—in Rosinvest,XII which was capitalized with an initial $200 million.110 Kolesnikov said he was informed by Shamalov and Gorelov that they had given Putin his bearer shares and that Putin had placed these in a safe: “The situation was specially done in such a way that nowhere would be anyone’s signatures.”111 After its founding in October 2005, the capital in Rosinvest rose, according to Kolesnikov, to 2 billion rubles in 2007 and 5 billion by 2009.112 Rosinvest then made payments to another company, Lirus, which the Financial Times confirmed was named in a 2005 contract as a co-investor in “Putin’s Palace,” “together with the Kremlin’s property department. Documents also show Lirus making payments to the presidential guard service for construction work on the same numbered contract.”113
In a recording released by Kolesnikov, he and Shamalov are holding a meeting in 2009 in Rosinvest’s office in Petersburg and are talking about Putin, whom they refer to as “Mikhayl Ivanovich,” and his investments in Rollins (parentheses in the original):
Sergey Kolesnikov (hereafter—SK): In Rollins, what kind of money did they lay out?
Nikolay Shamalov (NS): Here’s the list.
SK: Is this ours? Or Mikhayl Ivanovich’s?
NS: Mikhayl’s (Ivanovich) . . . (An argument breaks out about what part of the money lying in the Rollins’ offshore account in the British Virgin Islands belongs to “Mikhayl (Ivanovich)” and which part the other partners of Rosinvest).
NS: This is Mikhayl (Ivanovich’s) money—this they know.
SK: Mikhayl (Ivanovich’s)
money is 439,968,000 (U.S.). This is Mikhayl (Ivanovich’s) money.114
In an interview with the Washington Post Kolesnikov said that Putin was briefed regularly on his hidden wealth: “Two or three times a year, during 8 years, at Shamalov’s direction, I prepared financial summaries for him to personally update President Putin on his investments. . . . Immediately following each of these meetings, Shamalov would provide me with Putin’s comments and instructions for the use of funds.”115
Petromed appears to have played a significant role in running Putin’s tribute system, according to recordings made at Petromed offices in St. Petersburg and released to the New Times in 2012. In one conversation, which Kolesnikov said was between Gorelov and Shamalov, they recount a meeting between Putin and Ziyad Manasir.XIII They say that Manasir had been asked for a “gift” of “250 million,” whether dollars or rubles is not known, and that he had told Putin, “Vladimir Vladimirovich, if you say so, I will give.” Later, when they followed up with Manasir on the progress of his giving, he reassured them, “I want to give a gift, I want to give a gift.” “Voice one” (presumably Shamalov) tells Gorelov, “I said to him: ‘Do it and it will be engraved in gold letters that this was all from you! And the leadership will know that you did all of this, all of this is from your money, your gift.’ ” The “Second Voice” (presumably Gorelov) says, “He has another idea: He will build it all for free, on the condition that he will receive other orders.”117, XIV
Kolesnikov continued to run Petromed, but ultimately he became a whistleblower against what he documented was a massive diversion of funds by the Kremlin to build “Putin’s Palace.” He told the Washington Post that the $1 billion cost came from a “combination of corruption, bribery and theft.”119 Construction of the Palace began in the early 2000s, and by 2005 it had become a $16 million project. But then “in 2006 we won the right to host the Olympics. And by then the entire perspective changed. Prior to 2006, an endless presidency had not been planned. The idea of finding ways and means to extend the leadership of the country was in general a project of the 2004–6 period.” In line with this, the seaside mansion became a palace, one indeed fit for this “never-ending presidency.” As part of the expansion, they made an order to transfer the land from protected forest to nonforest designation on October 4, 2005, in Order No. 1575-g; they then used federal money to upgrade roads and bridges, install high-voltage power lines and gas pipelines, and install secure governmental communication lines.120 They added three helipads, a marina, private beach, summer house, guest and servant quarters, a winter theater, amphitheater, extensive recreational facilities, and a vineyard—twenty buildings in total within a massive private reserve. After the 2008 financial crisis, the amount of money left to spend on other projects shrank as all available funds were diverted to “Project South,” as it came to be called. Despite the fact that Zolotov’s Presidential Security Service was allegedly responsible for providing security and the Presidential Property Management Department for supervising the building,XV the palace was formally in Shamalov’s name. Whereas in the early period of building, the funds had largely come from “charitable contributions”—that is, tributes—from the offshore accounts of oligarchs like Abramovich eager to continue doing business with the Kremlin, the 2014 investigation by Reuters122 showed that the burden of paying for the palace shifted to the taxpayer when the sums required exceeded even the ability of oligarchs to pay. Considering the fact that the palace was to be listed formally as a private residence, Russia had never before seen the skimming of state funds for private purposes on such a grand scale (see page 300).123
When the money was diverted to the palace, thousands of Petromed and RosModulStroyXVI workers in Russian factories building German-designed modular units for health clinics were put out of work. This was the final straw for Kolesnikov. He sums up the frustration many felt with the Putin presidency as it wore on: “It turns out that you worked for so many years and gave your strength, knowledge, energy and a whole part of your life—for what? For the sake of this building on the shore? That will be visited three, four, five times a year . . . ? It is such an insult.”126
Closing the Circle
That such bold moves were taken within the first weeks of Putin’s inauguration shows, in retrospect, that Putin had a clearly conceived strategy coming into the presidency for how he would deal with wayward press and disobedient oligarchs. As the phrase goes, “For our friends, anything; for our enemies, the law!” (famously attributed to Brazilian president Getulio Vargas, who ruled with military backing from 1930 to 1954). Putin’s Ozero friends, St. Petersburg coworkers, and siloviki colleagues moved from a position of influence in one city to take up positions of influence throughout the economic and political structures of the country, and beyond. In the 1990s a major reason the excesses in privatization were allowed by the liberal reformers and their Western supporters was their belief that over time corrupt activities would give way to licit activities—initial ill-gotten gains would give way to the rule of law and ultimately good government as the new wealthy class sought to use law rather than violence to enforce contracts. Ordinary Russians voted for Putin precisely because they yearned for good government. But those who arrived with him pressured for and benefited from a new set of arrangements: not lawlessness, but not rule of law either—more like the rule of understandings or the rule of rules. And rule number one would be that the law would be applied only to someone who had broken the Kremlin’s internal rules—the guarantee of impunity before the law was the primary benefit of maintaining loyalty.
While benefiting from this regime inside Russia, the same elite established bank accounts in every conceivable tax haven abroad where their gains could be safeguarded. In the years after Putin was elected it became apparent that the new Russian elite had concluded they could increase and sustain their gains by first maintaining weak rule of law in Russia, thus allowing them to maximize their profits through predation and raiding and then by investing these gains in strong rule-of-law regimes in the West. They further ensured their own and their families’ personal security by keeping their children and their property in Europe. Inside Russia they could guarantee themselves immunity by becoming members of the Federation Council or the Duma or honorary consuls for a foreign government in Russia.XVII
When Putin became president in 2000, prosecutions against him were quietly dropped but not forgotten. Details became more widely known as his popularity was challenged in 2011 and 2012. For example, when the play Berlusputin opened in Moscow on February 14, 2012, the director Varvara Faer explained that one of the similarities between Berlusconi and Putin was their constant effort to escape criminal prosecution: “Putin was also under criminal investigation, which continued for half a year after he became president. But they decided that the president can’t be under investigation, and the criminal case must be closed regardless of what Putin did and what happened when St. Petersburg was left without any food supply in the early 1990s and people were freezing and half starving. No one remembers this for some reason. And Berlusconi is also constantly slipping away from prosecution. . . . It’s no accident that those two leaders are close friends.”129, XVIII
Thus the kleptocratic aspects of the Putin regime were present from the outset and were part of the motivation to engage in such perilous activities. The entire period from late 1999 until summer 2000 was filled with the huge risk for the incoming elite that governors, journalists, outgoing elites, cultural and intellectual leaders, and big business would not accept this change of regime type. While there were undoubtedly levels of instability and uncertainty in the Yel’tsin era, there was also political, economic, and informational freedom, all of which was being brought under Putin’s control. The extensive stories that started to appear in the Russian press immediately after Putin became acting president appear to have only heightened the sense of urgency to close down independent media. After all, the Reform of the Presidential Administration document that was leaked i
n May 2000 has a clear directive about how to deal with journalists and opposition leaders who try to address Kremlin corruption: as noted earlier, the section “The Information War with the Opposition” contains detailed examples about how to preempt, suppress, and discredit opposition exposés about corruption in the Kremlin, with the threat that those who sling mud and start investigations against the president will “inevitably receive the same treatment.”131 One cannot find a pithier summary of the Kremlin’s approach to such opposition forces as the anticorruption crusader Aleksey Navalnyy, who suffered a string of prosecutions beginning in 2012 on what he claimed were trumped-up charges, leading him to state, “I understand the logic of the authorities. They try to show everyone that if you do something not quite as they want, then they will terrorize you.”132
Putin presents a book about his rural lodge, Zavidovo, to Silvio Berlusconi, February 2003. Photo by Viktor Korotayev, AP
Clearly Western governments were trying to decide what the bottom line on Putin was. On the one hand, he talked about rule of law; on the other, about dictatorship of the law. On the one hand, he criticized 1990s oligarchs in public; on the other, his own business activities were being monitored by the West, resulting in the United States placing Russia on a list of money-laundering countries as a result of their knowledge of his activities with SPAG. On the one hand, he talked about freedom of the press; on the other, he threatened to use cudgels to bring dissident voices into line. Needless to say, Western governments had a lot of information about the gap between Putin’s global charm offensive and his private behavior and the behavior of his inner circle, as the Wikileaks documents and other sources of information have shown.