Putin's Kleptocracy_Who Owns Russia?

by Karen Dawisha

  Amid the international furor, Putin hit back, saying that Magnitskiy had died of heart failure: “Do you think no one dies in American jails? So what?”43 The U.S. Congress passed a bill in 2012 putting those directly responsible for Magnitskiy’s death and for the illegal seizure of Browder’s assets in Moscow on a visa ban list. In an infantile knee-jerk reaction, Putin banned the adoption by Americans of Russian children. In 2013 both Browder (in absentia) and Magnitskiy (deceased) were put on trial in Moscow and sentenced to prison for tax evasion. This was regarded as the first conviction of a deceased person in Russian history.44 Such was the fate of a truly independent member of the Gazprom board of directors.II

  The use of intermediary firms as nontransparent, value-draining (and criminal) enterprises is legendary throughout the Russian economy, but Gazprom definitely gets the prize. A U.S. Embassy cable released through Wikileaks concluded that RosUkrEnergo (RUE) was a money-making operation for the Kremlin. Gazprom itself owned 50 percent of RUE, and 50 percent was owned by two Ukrainian oligarchs, Dmitriy Firtash (45 percent) and Ivan Fursin (5 percent). But “the circle of true beneficiaries of RUE is wider and includes Semyon Mogilevich, a Russian organized crime boss wanted by the FBI and currently in custody in Russia.” Mogilevich was soon released and took up residence in Moscow, where he lives freely. The Ukrainian government insisted that RUE be removed as a middleman, but the U.S. Embassy reported that another intermediary company had already been registered to take its place.46

  Focus on RUE was important because it was seen in the West as a major vehicle for bringing together the Kremlin, business interests, and organized crime. Beginning in the mid-2000s the U.S. intelligence community provided a major assessment of the threat to U.S. national security posed, according to a Justice Department source, by the “growing nexus in Russian and Eurasian states among government, organized crime, intelligence services, and big business figures,” including in the fields of energy and finance.47 Without naming Russia or Putin specifically, Attorney General Michael Mukasey stated that of all the threats posed by international organized crime, the first was that “international organized criminals control significant positions in the global energy and strategic materials markets. . . . So-called ‘iron triangles’ of corrupt business leaders, corrupt government officials, and organized criminals exert substantial influence over the economies of many countries. . . . One of the most well-known recent examples is the case of Semyon Mogilevich [who] . . . is said to exert influence over large portions of the natural gas industry in parts of what used to be the Soviet Union.”48

  Mogilevich’s relationship to Putin is of utmost interest but is not likely to be written about in open-source texts. However, their relationship was the subject of a conversation illicitly recorded by the security chief of the Ukrainian president Leonid Kuchma. The conversation is said to be between Leonid Derkach, the former head of the Ukrainian security services (SBU), and Kuchma on February 8, 2000:

  Kuchma: Have you found Mogilevich?

  Derkach: I found him.

  Kuchma: So, are you two working now?

  Derkach: We’re working. We have another meeting tomorrow. He arrives incognito.

  Later in the discussion Derkach revealed a few details about Mogilevich:

  Derkach: He’s on good terms with Putin. He and Putin have been in contact since Putin was still in Leningrad.

  Kuchma: I hope we won’t have any problems because of this.

  Derkach: They have their own affairs.49, III

  In addition to RosUkrEnergo, an investigation by the anticorruption crusader Aleksey Navalnyy showed that Gazprom was buying gas from an independent producer, Novatek, through an intermediary, Transinvestgas. Police discovered that days before the purchase, Gazprom had turned down an offer to buy gas directly from Novatek, cutting out Transinvestgas, for 70 percent less. Transinvestgas transferred $10 million of the amount received to a “consulting company,” which the police found had been registered using “two stolen passports.”51

  All these activities, plus asset stripping in which subsidiary companies were sold to Kremlin insiders at below-value prices, led the economist Anders Åslund to calculate that in 2011 alone, the total amount of waste and corruption in Gazprom may have reached $40 billion, as compared to $44.7 billion in profits—a situation that prompted him to conclude that the company resembled more an “organized crime syndicate” than a legal corporation.52 Gazprom has more than one hundred wholly or majority-owned subsidiaries and affiliated companies registered in Russia as of 2014,53 and another hundred subsidiaries were registered abroad already by 2007, including five in the Virgin Islands, nine in Cyprus, seven in Switzerland, and two in the Cayman Islands.54 Undoubtedly other international oil companies have similar offshore registrations for their subsidiaries. The U.S. Securities and Exchange Commission lists twenty-two of Exxon’s subsidiaries as being registered in the Bahamas alone, where corporate tax rates are lower.55 As a publicly traded but private company, Exxon obviously seeks to maximize return to its investors. The difference is that it is not immediately clear why a state-owned company like Gazprom would be motivated to engage in asset stripping and then to allow these subsidiaries to register in tax havens and avoid paying state taxes. The rationale is simple: by stripping assets from the state-owned part of the company and selling them to insiders and relatives as subsidiaries, they can be registered abroad as private entities, operating in the world’s tastiest tax havens for the personal benefit of their private owners, not Russian taxpayers. In any Western country, this would be called criminal malfeasance. In Russia it is called government.

  Both the board of directors and the Management Committee of Gazprom are packed with Putin coworkers from the KGB and St. Petersburg who lack prior significant energy experience:

  • Chairman of the Management Committee Aleksey Miller, Putin’s deputy in St. Petersburg at the Committee for Foreign Liaison

  • Chairman of the Board of Trustees Viktor Zubkov, deputy chairman of the agricultural subcommittee of Putin’s KVS, head of the district where Putin’s dacha was built

  • Member of the Board Valeriy Musin, who was Putin’s supervisor in the Law Faculty at Leningrad State University

  • Member of the Board Andrey Akimov, who was a banker in Vienna at the time the CPSU and KGB money started to be sent abroad

  • Deputy Chairman of the Management Committee Valeriy Golubev, formerly Leningrad KGB, St. Petersburg mayor’s office, head of Vasileostrovskiy District when Putin moved into an apartment there

  • Head of Gazprom’s Investment and Construction Department Yaroslav Golko, said by Russian analysts to be a Rotenberg protégé

  • Chief Accountant Elena Vasil’eva, who had worked with Miller in St. Petersburg’s ports56

  • Aleksandr Medvedev, another Vienna banker with an alleged KGB background

  • Head of Gazprom’s Department of Finance and Economics Andrey Kruglov, who was head of the Foreign Operations Department of Dresdner Bank when Matthias Warnig was its chief.57

  Named in Barron’s in 2014 as the “Worst-Managed Company on the Planet,” Gazprom was trading in May 2014 at a 43 percent discount, compared to an average of 3 percent for other European energy companies.58 Its share price had dropped from just under $16 in 2008 to just over $4 in late spring 2014, after the stock had rebounded from a $3 low during the Crimean crisis.

  Despite the Russian state’s obvious need for more financial inflows, when Gazprom signed a thirty-year gas deal with China in May 2014, it is telling that Putin sweetened the package by giving Gazprom a tax break. Such a move will deprive the Russian budget, according to the Russian economist Konstantin Sonin, “of most of the potential income from the deal.”59 Some analysts hope that companies close to the Kremlin will alter their ways and stop taking such a huge skim for personal and nonrelated state projects so that the companies can become more profitable. These analysts fail to understand the logic at the core of the system: profound access to
riches is provided in return for absolute loyalty. Putin alone decides who and what will be profitable. There is no more important rule in today’s Russia.

  Kleptocracy’s Development

  The capture of the state and its financial reserves by the cronies around Putin has been a distinguishing feature of his entire rule.IV In this kleptocracy, the state nationalizes the risk but privatizes the reward. Access to this closed group required loyalty, discipline, and silence. Once within the group, officials could maraud the economy with impunity. Key to its successful functioning over time has been the unity of the key officials and their willingness to allow Putin to be the ultimate arbiter of any disputes, without using (and indeed undermining) the written law.

  This kleptocracy has gone through several phases, although its aims have remained consistent. The first was the phase of primitive accumulation as the group emerged from their St. Petersburg roots, moved into positions of power in the Moscow bureaucracy, and removed or tamed the Yel’tsin oligarchs.

  The second phase came after the takeover of Khodorkovskiy’s company, Yukos, in 2003, when the company was seized and torn apart and its key assets reemerged as a new company, Rosneft, with Igor Sechin, the deputy head of Putin’s administration, chairing its board of directors. In this phase, which lasted until 2011, beyond Dmitriy Medvedev’s election as president in 2008 (with Putin moving over to become prime minister while retaining full actual powers), Putin allies within the government took up positions on the board of state-owned companies over which they simultaneously had supervisory powers. It was as if the U.K. minister of culture, media, and sport worked in her government office in the morning and made money as a BBC trustee in the afternoon. Except that in 2012 BBC trustees received on average $53,000 per year before taxes, after taking a cut from the previous year,60 whereas Gazprom board members in 2012 received annual compensation in excess of $2 million each, after tax.61

  This system provided enormous personal benefits to core elites: sitting as they did both on private boards of directors and in public office, they were able to steer state funds into their companies. When the economy almost collapsed in 2008, the Russian government bailed out state-supported banks first, to the tune of 5 trillion rubles (approximately $230 billion),V in a move in which government ministers who sat on boards (such as Finance Minister Kudrin, who sat on the board of VTB Bank) simply helped themselves to their own private stimulus package. But instead of using the money to stabilize the Russian ruble (which plummeted from 23RR/US$ to 36RR/US$) or the stock market (which lost 80 percent of its value), it only stimulated capital flight. Kudrin estimated that between October 2008 and January 2009, $200 billion was taken out of the country—i.e., virtually the entire stimulus.62

  In addition the interlocking system of public officeholders with private interests allowed these place-holders to always act with impunity. Russia’s long tradition of seeing the state itself as the source of law, based on the German idea of Rechtsstaat and its Russian equivalent, pravovoe gosudarstvo, gives great advantage to any firm or official enjoying state protection. In Russia historically, acts by state officeholders are typically not challenged in the politically compromised court system, while acts against or outside the state are vigorously prosecuted.63

  This is not only a theoretical proposition, since the law provides immunity from prosecution for senators and Duma members and special consideration for those with state awards. All of Putin’s cronies have received dozens of state awards—and as the oligarch Vladimir Gusinskiy happily discovered when his lawyer was able to get him released from prison in 2000, courts in Russia provide leniency in sentencing to those who have received state orders, which were reintroduced from tsarist times in spring 2000.64 Gusinskiy had one such award. A cursory examination of Wikipedia reveals that Vladimir Yakunin, an Ozero cofounder and Russian Railways chief, has at least twenty-eight. And if this was not enough protection, members of the cabal could as already discussed become consuls of a foreign country in Russia, like Ozero members Viktor Khmarin, Sergey Fursenko, and Yuriy Koval’chuk, giving not only their persons inviolability but also their luggage, cars, and property.65, VI In these ways, their positions close to Putin provide them with the ability to act with impunity, and their official positions provide them with immunity from effective prosecution.

  While opposition elites long decried the emergence of corporatist tendencies, and with it the diminution of democracy, in this second phase it was not the subject of open discussion among insider elites themselves, who were content with public protestations of fealty to democracy but privately acknowledged unwritten “understandings” about how the inner structure actually worked. The discussion, however, was brought into the open by Viktor Cherkesov, at that time the head of the Federal Narcotics Control Service in Russia, when he lamented, apparently under pressure himself, that the stability of the ruling elite could be lost if people were to abandon the norms of the unity of the corporation and go over to an ethos of personal self-aggrandizement and war of “all against all.” He wrote that Russia had three paths, the best being the thoroughgoing development of civil society and the worst being the slide into dictatorship. But there was also a middle option, a corporatist model that he preferred, because, at least in 2007, it bore the closest comparison with what actually existed at that time. Building an elite who consider themselves bound by corporatist principles is most likely, Cherkesov wrote, to “provide long-term stability and gradual escape from deep socio-cultural depression. I understand full well that in this scenario there are huge risks, including the danger of transforming a great country into a quagmire on the model of the worst Latin American dictatorships with their social closedness and neo-feudalism. But this is not a foregone conclusion. Besides negative, corporatism can also be positive. . . . As long as the stability of society to a significant degree relies on this force, the question of its quality is a question of the fate of the country.”67 Cherkesov’s public criticism of the quality of some of those who were at the top, who had switched from being “warriors” to “traders,” cost him his job.

  The internal rules governing this elite were the subject of testimony before the U.S. Congress by Andrey Illarionov, who had been Putin’s economic advisor for his first five years in office and was dismissed in 2005 for sounding alarm bells about the emergence of Russia as a corporate state. For Illarionov, this corporation came out of the traditions of the secret police and operated according to strict rules. As he said in his testimony, “The members of the Corporation do share strong allegiance to their respective organizations, strict codes of conduct and of honor, basic principles of behavior, including among others the principle of mutual support to each other in any circumstance and the principle of omertà [the mafia code of silence]. Since the Corporation preserves traditions, hierarchies, codes and habits of secret police and intelligence services, its members show a high degree of obedience to the current leadership, strong loyalty to each other, rather strict discipline. There are both formal and informal means of enforcing these norms. Violators of the code of conduct are subject to the harshest forms of punishment, including the highest form.”68

  Andrey Piontkovskiy, a lead researcher at the Institute for Systems Studies of the Russian Academy of Sciences, provided the following apt definition of this phenomenon:

  The right to property in Russia is entirely conditional upon the property owner’s loyalty to the Russian government. The system is tending to evolve not in the direction of freedom and a postindustrial society, but rather back toward feudalism, when the sovereign distributed privileges and lands to his vassals and could take them away at any moment. The only difference is that, in today’s Russia, the things that Putin is distributing and taking away are not parcels of land, but gas and oil companies. Over the last decade, a mutant has evolved that is neither socialism nor capitalism, but some hitherto unknown creature. Its defining characteristics are the merging of money and political power; the institutionalization of corrupt
ion; and the domination of the economy by major corporations, chiefly trading in commodities, which flourish thanks to public resources.69

  During this second phase, Putin appointed his core supporters into positions in the government and on the boards of key state-controlled companies (see Table 5).

  Medvedev’s Decree 1999 forcing government ministers holding supervisory roles in the government to quit their board positions was welcomed by opposition activists and the international community, which had begun to loudly protest this flagrant violation of the basic principles of corporate governance and good government. Medvedev spoke against this system and signaled his desire to move Russia beyond such a state. But ministers immediately moved to shape the choice of their replacements on these boards; the Rosneft CEO even reassured jittery Russian markets that “Sechin will keep control and . . . will even strengthen [Rosneft].”70 These open efforts to undermine Medvedev’s decree led Aleksey Navalnyy to lament that nothing had changed and that Medvedev’s intentions were being undermined: “This problem is extremely serious because it creates a feudal regime. I’m skeptical that this decision to remove officials from state company boards will have an effect because all these companies under state control are turning into the personal property of these officials through their children.”VII

  Table 5. Interlocking Directorates: Putin as Prime Minister, 2008–Spring 2011

  Government Position in 2008

  Board Memberships 2009

  Aleksey Kudrin

  Deputy prime minister and minister of finance

  VTB Bank ALROSA

  Igor Levitin

  Minister of transport

  Sheremetyevo Airport Aeroflot

  Igor Sechin