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Putin’s allies channelled billions to oligarch who backed pro-Russian president of Ukraine

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RED RIBBON: Then Ukrainian President Viktor Yanukovich (left) and Dmitry Firtash, one of Ukraine's richest men, in 2012, at the opening ceremony of a new sulphuric acid plant in Crimea. The friendship between the two men benefited both, as well as Moscow. REUTERS/Mykhailo Markiv

MOSCOW/KIEV – In Russia, powerful friends helped him make a fortune. In the United States, officials want him extradited and put behind bars. In Austria, where he is currently free on bail of $155 million, authorities have yet to decide what to do with him.

He is Dmitry Firtash, a former fireman and soldier. In little more than a decade, the Ukrainian went from obscurity to wealth and renown, largely by buying gas from Russia and selling it in his home country. His success was built on remarkable sweetheart deals brokered by associates of Russian leader Vladimir Putin, at immense cost to Russian taxpayers, a Reuters investigation shows.

Russian government records reviewed for this article reveal for the first time the terms of recent deals between Firtash and Russia’s Gazprom, a giant gas company majority owned by the state.

According to Russian customs documents detailing the trades, Gazprom sold more than 20 billion cubic metres of gas well below market prices to Firtash over the past four years – about four times more than the Russian government has publicly acknowledged. The price Firtash paid was so low, Reuters calculates, that companies he controlled made more than $3 billion on the arrangement.

Over the same time period, other documents show, bankers close to Putin granted Firtash credit lines of up to $11 billion. That credit helped Firtash, who backed pro-Russian Viktor Yanukovich’s successful 2010 bid to become Ukraine’s president, to buy a dominant position in the country’s chemical and fertiliser industry and expand his influence.

The Firtash story is more than one man’s grab for riches. It demonstrates how Putin uses Russian state assets to create streams of cash for political allies, and how he exported this model to Ukraine in an attempt to dominate his neighbour, which he sees as vital to Russia’s strategic interests. With the help of Firtash, Yanukovich won power and went on to rule Ukraine for four years. The relationship had great geopolitical value for Putin: Yanukovich ended up steering the nation of more than 44 million away from the West’s orbit and towards Moscow’s until he was overthrown in February.

“Firtash has always been an intermediary,” said Viktor Chumak, chairman of the anti-corruption committee in the previous Ukrainian parliament. “He is a political person representing Russia’s interests in Ukraine.”

A spokesman for Putin rejected claims that Firtash acted on behalf of Russia. “Firtash is an independent businessman and he pursues his own interests, I don’t believe he represents anyone else’s interests,” said Dmitry Peskov.

The findings are the latest in a Reuters examination of how elites favoured by the Kremlin profit from the state in the Putin era. In the wild years after the fall of the Soviet Union, state assets were seized or bought cheaply by the well connected. Today, resources and cash flows from public enterprises are diverted to private individuals with links to Putin, whether in Russia or abroad.

Putin’s system of comrade capitalism has had huge costs for the ordinary people of Russia: By granting special cheap deals to Firtash, Gazprom missed out on about $2 billion in revenue it could have made by selling that gas at market prices, according to European gas price data collected by Reuters. Four industry analysts said that Gazprom could have sold the gas at substantially higher prices to other customers in Europe.

At the same time, the citizens of both Russia and Ukraine have seen unelected oligarchs wield political influence.

Firtash, whose main company, Group DF, describes him as one of Ukraine’s leading entrepreneurs and philanthropists, was arrested in Austria on March 12 at the request of U.S. authorities. The Americans accuse him of bribery over a business deal in India unrelated to events examined in this article. Firtash denies those allegations and is currently free on bail.

Firtash imported the cheap Russian gas through a Cypriot company of which he is sole director, and a Swiss one set up by Group DF. He and Group DF declined to answer questions about those two companies and their gas dealings. A spokesman said Firtash was not available to discuss his business operations, and that Group DF did not wish to comment on “any of the questions you put forth.”

The Kremlin spokesman Peskov said Putin has met Firtash but that they are not close acquaintances. He said Russia supplied gas at “lower prices” to Ukraine because Yanukovich had asked for it and Russia wanted to help Ukraine’s petrochemical industry. Peskov said the deals were arranged through Firtash because “the Ukrainian government asked for it to be that way.”

Yanukovich, who fled to Russia in February after mass demonstrations against his government, could not be reached for comment.

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POWER: A Gazprom sign in front of Moscow’s White House, seat of the Russian prime minister. The Russian firm sold about four times more gas at below-market prices to Ukrainian Dmitry Firtash in 2012-2013 than Moscow has publicly acknowledged. The price was so low, Reuters calculates, that companies controlled by Firtash made more than $3 billion. REUTERS/Sergei Karpukhin

The Middleman

From the moment he first became Russia’s president, Putin moved to take control of his country’s most valuable resource: natural gas. After assuming power in 2000, he replaced the management of Gazprom, put trusted allies in charge, and ensured the Russian state controlled more than half the shares.

The corporate behemoth now supplies about a third of Europe’s gas, generating vital revenue for Russia and giving Putin a powerful economic lever. “Gazprom is very much a tool of Russian foreign policy,” says Rem Korteweg, senior research fellow at the Centre for European Reform. Every major deal that Gazprom signs is approved by Putin, people in the energy industry say.

Putin’s spokesman rejected such assertions: Gazprom, he said, “is a commercial, public company, which has international shareholders. It acts in the interests of its shareholders, which also include the Russian state.”

In normal times, Gazprom’s second biggest customer in Europe is Ukraine; Russian gas was piped directly across the border between the two countries until Russia cut off supplies earlier this year.

In the 2000s, though, Gazprom decided to sell gas not directly to Ukraine’s state gas company Naftogaz, but to intermediaries – in particular Firtash, an international gas dealer who had risen from humble origins.

Firtash grew up in west Ukraine, where his father worked in education and his mother in a sugar factory, according to an account Firtash gave during a meeting with the U.S. ambassador in Kiev in 2008. Both his parents disdained communism and lacked the contacts needed to get their son into university, he said.

He joined the army in 1986, then trained to be a fireman. When the Soviet Union collapsed, leading to Ukraine’s independence in 1991, Firtash found himself having to make a living in an uncertain world, according to his account to the ambassador. With his first wife, he set up a business in west Ukraine shipping canned goods to Uzbekistan, according to local media reports researched by the U.S. embassy.

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A U.S. diplomatic cable, which summarised Firtash’s discussion with the ambassador, drily noted: “Due to his commodities business, (Firtash) became acquainted with several powerful business figures from the former Soviet Union.”

According to the cable, Firtash told the U.S. ambassador he had been forced to deal with suspected criminals because at that time it was impossible to do business in Ukraine cleanly. He said he had needed and received permission from a man named Semion Mogilevich to establish various businesses. Mogilevich, an alleged boss of organised crime in eastern Europe, is wanted by the U.S. Federal Bureau of Investigation for an alleged multi-million-dollar fraud in the 1990s involving a company headquartered in the United States. He was indicted in 2003, and described by the FBI in 2009 as having an “extensive international criminal network.”

Firtash has repeatedly denied having any close relationship with Mogilevich. Mogilevich could not be contacted for comment. He has previously denied any wrongdoing or any connection to the gas trade in Ukraine.

By 2002, a company called Eural Trans Gas, registered in Hungary, was transporting gas from Turkmenistan through Russia to Ukraine. Its ownership was unclear, but Firtash represented it. In July 2004, a new company, RosUkrEnergo, became the intermediary for gas deals between Russia and Ukraine. The owners of RUE were unknown at first, but it later emerged that nearly all of the company was owned by Firtash and Gazprom.

RUE bought gas cheaply and sold it on at a higher price in Ukraine and Europe. This arrangement guaranteed profits for RUE and was hugely controversial among Ukrainians who saw RUE as an unnecessary intermediary. Another U.S. diplomatic cable, from March 2009, described RUE as a “cash cow” and a “serious source of ... political patronage.” In a website posting, RUE said that in 2007 it sold nearly $10 billion worth of gas and had net income of $795 million.

After Yulia Tymoshenko, herself a former gas trader, became prime minister of Ukraine in 2008, she reacted to public anger about the gas trade and moved to cut Firtash and RUE out of the business. She struck her own gas deal with Putin in 2009.

By that time, Firtash was rich. In the country’s 2010 presidential election, Firtash, by his own admission, aided the pro-Russian Yanukovich. A U.S. diplomatic cable described Firtash as a “major financial backer” of Yanukovich.

“Firtash supported Yanukovich in various ways,” said Vadym Karasiov, an aide to Viktor Yuschenko, Ukraine’s president from 2005 to 2010, in an interview. Karasiov said the mogul used his influence in the media to promote Yanukovich. In April 2010, in the aftermath of the election, Karasiov told the Kiev Post: “Without Dmitry Firtash there wouldn’t have been a (Yanukovich) victory.”

With Yanukovich president, Tymoshenko stepped down as prime minister. Business associates of Firtash were appointed to influential positions in the new administration. He had allies in the corridors of power, and ambitious plans to expand his business empire and get back into the gas trade. His friends in Russia were happy to help him.

THE LOANS

Tucked away in Nicosia, Cyprus, a bundle of tattered papers wrapped in string records Russian credit agreements made to Firtash companies. The documents, reviewed by Reuters, detail a series of financing deals worth billions of dollars.

The deals were arranged by a Russian lender called Gazprombank. Despite its name, the bank is not controlled by Gazprom, which holds only a minority stake. It is a separate business, overseen by people linked to Putin. They include Yuri Kovalchuk, a banker who until March 2014 controlled an investment firm that manages a majority stake in Gazprombank. (See “Kremlin links to Gazprombank.” For more on Kovalchuk, see Part 4 of this series.)

In a statement, Gazprombank said: “We do not receive any instructions from the Kremlin … The strategy of the bank is developed by its management board and approved by the board of directors. No other influence is possible.”

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Asked whether Putin had any role in issuing the loans to Firtash companies, Kremlin spokesman Peskov said: “Putin, as president, does not have anything to do with this.”

Gazprombank began lending money to Firtash companies soon after Yanukovich took power in Ukraine in February 2010.

In June that year, Firtash established a company called Ostchem Investments in Cyprus. A month later, Gazprombank registered a credit line to the company of $815 million, according to the Cyprus documents. In September, Ostchem Investments bought a 90 percent stake in the Stirol fertiliser plant in Ukraine. It was perfect synergy: Firtash knew the gas business, and natural gas is a major feedstock for making fertiliser.

Further loans and deals with Firtash companies followed.

Reuters found that by March 2011, Gazprombank had registered credit lines of up to $11.15 billion to Firtash companies. The companies may not have borrowed that whole sum, but the documents indicate that loans up to that amount were available, according to Cyprus lawyers.

In the space of seven months in 2011 alone, Firtash acquired control of two more fertiliser plants in Ukraine, Severodonetsk Azot and Rivne Azot. He also bought the Nika Tera sea port, through which fertiliser and other dry bulk goods are shipped. He acquired a lender called Nadra Bank and invested in the titanium processing industry.

Such was his expansion that Firtash became the fifth largest fertiliser producer in Europe. Being a large employer brought not just potential profits but also political clout, he boasted. “We have relations with MPs,” Firtash told Die Presse in Austria in May. “We are big employers in the regions that they represent. Entire cities live on our factories. Election candidates seek our support.”

When asked in 2011 where the money came from to pay for his acquisitions, Firtash was coy. At a press conference called to announce his purchase of the Severdonetsk plant, he declined to name his major lenders. “It’s a secret,” he told Ukrainian journalists.

But a Gazprombank manager told Reuters that the Russian bank had led a consortium of lenders which in 2011 agreed to lend about $7 billion to Firtash. The official said Gazprombank itself lent Firtash $2.2 billion, and that Firtash still owed the bank $2.08 billion. The official declined to name other lenders in the consortium.

A $2.2 billion loan was a big commitment for Gazprombank: It amounted to nearly a quarter of the bank’s total capital, the maximum loan allowed by Russian banking rules for any single client or group. Based on regulatory filings, the loan facility made Firtash the biggest single borrower from Gazprombank.

Reuters was unable to establish exactly how much in total the Gazprombank consortium lent to Firtash companies.

In a statement, Gazprombank said that “the aggregate amount of loans disbursed to Ostchem Group” was “several times lower” than $11 billion. “And all capital requirements and limitations of the Central Bank of Russia in respect of loans granted have always been complied with by Gazprombank, including loans to Ostchem Group,” the statement said.

The bank declined to give any further details, saying it had to protect client confidentiality. The central bank had no comment.

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JUDO CONNECTIONS: Russian President Vladimir Putin shakes hands with the head of Russia's judo federation, Vasily Anisimov, during a meeting with members of the Olympic judo team in 2012. When Dmitry Firtash was arrested in Vienna earlier this year, Anisimov loaned the Ukrainian businessman $155 million for bail. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

GAS PROFITS

Firtash now had money, political connections and businesses that relied on large supplies of gas. What he needed next was fuel.

In January 2011, Firtash signed an unpublished agreement, seen by Reuters, with Gazprom to buy gas through a company called Ostchem Holding in Cyprus, where he is the sole director listed.

The gas deal was later extended to include sales to Ostchem Gas Trading AG in Switzerland. It was also agreed by Naftogaz, Ukraine’s state-owned gas firm, where Yanukovich had installed new senior management. Firtash needed Naftogaz’s sign-off because it controlled pipelines delivering gas and, until that point, had an exclusive deal to import gas from Gazprom.

Naftogaz’s decision to agree to the deal was an odd one. Not only did it mean Naftogaz would surrender its monopoly on Russian gas imports, but the deal could also potentially damage the state firm. Naftogaz had previously agreed with Gazprom to pay for a set amount of gas whether it could sell it in Ukraine or not. Firtash’s deal could leave the Ukrainian state firm buying gas it would struggle to sell.

Firtash’s return to importing gas became public knowledge after Yanukovich’s election victory. But the price he paid Moscow, and how much cheap gas he bought, remained unclear. An Ostchem spokesman told Reuters the price was “confidential information.”

Russian customs records seen by Reuters show that in 2012, Moscow sold the gas to Firtash for $230 per 1,000 cubic metres (the standard unit used in gas sales). In 2013 the average cost was $267 per unit. Those prices were at least one-third less than those paid by Ukraine’s Naftogaz.

Kremlin links to Gazprombank
Gazprombank was created by state-owned gas giant Gazprom, and most of the bank’s shares are still owned by entities connected to the gas firm. Private businessmen close to Putin also wield influence, by managing those shares or because they are in senior positions at the bank.

Main listed shareholders:

Gazfond
Large private pension fund: 49.6%

Gazprom
Gas company majority state-owned: 35.5%

Vnesheconombank
State-owned bank: 10.2%

Gazprombank staff:
The bank’s chief executive is Andrei Akimov, who has been described in Russian media as close to Putin. A spokesman for Akimov said he knew Putin only through official meetings, and that Putin had played no role in Akimov’s appointment.

The bank’s deputy chairman is Yuri Shamalov, son of Nikolai Shamalov, a close associate of Putin. The younger Shamalov is also chairman of Gazfond, the bank’s largest shareholder. Yuri Shamalov was unavailable to comment; his father did not respond to questions about his connections to the Kremlin.

Another Gazprombank director is Sergei I. Ivanov, son of Sergei B. Ivanov, the chief of staff at the Kremlin. The younger Ivanov said his father’s position had “only hindered” his work at Gazprombank.

Putin allies and key management company:
Gazfond’s near majority stake in Gazprombank is managed by a financial company called ZAO Lider. Until March 2014, Lider was indirectly controlled by Bank Rossiya. Bank Rossiya’s main shareholder is Yuri Kovalchuk, a long-standing associate of Putin. Kovalchuk owns 40 percent of Bank Rossiya. Nikolai Shamalov is also a shareholder in the bank. Kovalchuk and Shamalov did not respond to requests for comment.

In March 2014, Lider’s ownership changed. Bank Rossiya no longer has indirect control; instead, Gazfond now owns 45 percent of Lider.


Ukrainian customs documents and corporate filings show that Firtash’s Ostchem companies in Cyprus and Switzerland resold the gas to his chemical plants in Ukraine for $430 per unit. The prices and volumes suggest that the two offshore Ostchem companies made an operating profit of approximately $3.7 billion in two years.

Naftogaz’s current management is highly critical of the way in which Gazprom favoured Firtash’s companies. Aliona Osmolovska, chief of press relations, said: “These special deals for Ostchem were not in the interest of Ukraine.”

The real loser in the deal, though, was Gazprom. The arrangement, which Putin described during a press conference as having been made with the “input of the Russian leadership,” meant Russia sold its gas to Firtash for at least $100 per unit less than it could have made in Western Europe, according to Emily Stromquist, head of Russian energy analysis at Eurasia Group, a political risk research firm.

In addition, the profits from the subsequent resale of the gas were all reaped offshore by companies that did not benefit the Russian taxpayer. Those profits in 2012 and 2013 would have meant an additional $2 billion for Gazprom, whose ultimate majority owners are Russia’s citizens.

Gazprom declined to comment on its sales to Firtash’s companies.

Putin’s spokesman Peskov said Naftogaz agreed to Firtash receiving gas at low prices because the deal was intended to help Ukraine’s petrochemical industry. Asked why the gas was sold to companies in Cyprus and Switzerland, Peskov said: “Putin doesn’t need to approve this action. These operations are technical and were made by Gazprom according to the structures which are always used by its Ukrainian partners.”

Neither of the two Firtash companies that bought gas from Russia publishes accounts. Firtash declined to comment on the firms or their results.

UNEASY STANDOFF

The new government in Ukraine alleges that Yanukovich had allowed corruption to flourish and stolen millions of dollars. In the longer term, the new government says it wants to forge closer ties with the European Union and reduce its dependence on Russian gas.

In June, Moscow cut off supplies of gas to Kiev, claiming that it was owed billions of dollars by Ukraine’s state-owned Naftogaz. Late last month, the two countries struck a deal allowing supplies to resume, but the agreement runs only until March. Firtash retains large stocks of gas but has not imported new supplies since Yanukovich was ousted.

Firtash remains in Austria awaiting the outcome of extradition hearings. According to a U.S. indictment unsealed in April, he is suspected of a scheme to bribe Indian government officials to procure titanium. Two U.S. government officials said the American investigation into Firtash is continuing; they declined to give further details.

The Ukrainian oligarch has said the allegations are “without foundation” and has accused Washington of acting for "purely political reasons." He has hired an all-star legal defence team. It includes Lanny Davis, who helped President Bill Clinton weather a series of White House scandals in the 1990s.

In his time of trouble Firtash has not been deserted by the Russians. Since his arrest he has received another loan in order to pay his bail: $155 million from Vasily Anisimov, the billionaire who heads the Russian Judo Federation, the governing body in Russia of Putin’s beloved sport.

“I have known Mr. Firtash for a number of years, though he is neither my friend nor business partner,” Anisimov told Reuters in an email. “I confirm that I loaned 125 million euros to him. This was a purely business transaction.”

From Comrade Capitalism

@LeveragedBuyout @Nihonjin1051 @vostok @senheiser (avoid the "western propaganda" angle) - any thoughs?
 
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Billion-dollar medical project helped fund “Putin’s palace” on the Black Sea

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THE LEADER: President Vladimir Putin, here in the Kremlin in late March, stabilised Russia’s economy and re-established its regional power. But corruption remains widespread. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

MOSCOW - In 2005, President Vladimir Putin personally ordered up a vast programme to improve Russia’s poor healthcare facilities. Five years later, authorities found that suppliers were charging some hospitals two or even three times too much for vital gear such as high-tech medical scanners.

Dmitry Medvedev, serving as Putin’s hand-picked successor at the time, went on national television to denounce the alleged scam. The perpetrators, he said, had engaged in “absolutely cynical, loutish theft of state money.” Medvedev instructed Russia’s top law enforcement agencies to make sure that “everyone who participated in this is seriously and sternly punished.”

Suspects were rounded up in far-flung places, and in 2012 the police ministry said 104 people had been charged in connection with overpriced scanners. Several local officials and business executives were convicted of fraud and sent to prison.

But a Reuters investigation has found that two wealthy associates of Putin engaged in the same profiteering and suffered no penalty.

They sold medical equipment for at least $195 million to Russia and sent a total of $84 million in proceeds to Swiss bank accounts, according to bank records reviewed by Reuters. The records also indicate that at least 35 million euros ($48 million) from those accounts were funnelled to a company that then helped construct a luxury property near the Black Sea known as “Putin’s palace” - a nickname earned after a businessman alleged that the estate was built for Putin. The Russian leader has denied any connection to the property.

These findings are part of a Reuters investigation into how associates of the Kremlin profit from state contracts in the Putin era. This and a later article examine what became of the president’s grand hospital undertaking. Another story, drawing on a confidential database of Russian bank records, will explore billions of dollars in spending on state railway contracts.

The wealth of Putin’s comrades has come under global scrutiny amid sanctions imposed by the United States and Europe on the president’s associates over the crisis in Ukraine.

Russia has been renowned for graft since the Soviet Union fell a generation ago. Under the first post-Soviet leader, Boris Yeltsin, “oligarchs” gained control of state-owned industries and grew fabulously wealthy. Those wild days are long over.

Yeltsin’s successor, Putin, has restored much of the nation’s most lucrative industries, such as oil and gas, to state control. Many citizens feel Putin’s Russia is a vast improvement from the chaos of the Yeltsin era. Putin, a former KGB officer, has brought order. Rising oil prices have driven growth. Russia’s economy has more than doubled on his watch, measured by income per head.

But corruption remains a deep-seated problem. The path to wealth today, say independent economists, lies not in seizing government assets but in tapping the vast flow of business the state does with the private sector.

“The current system in Russia is based not on corruption in the traditional sense, but on a complete merger of public service and private business interests,” said economist Vladislav Inozemtsev, director of the Institute for Post-Industrial Studies, a think tank in Moscow.

One reason the well-connected can game the state contracting system: In Russia, doing so may be perfectly legal.

Lax rules, poorly enforced, make it possible for state entities to give contracts to companies that do not disclose their owners or have no presence at their registered address. Russian legislation doesn’t expressly forbid collusion or ownership affiliations between competitors in public tenders. It is in this grey zone, more so than in outright theft, that graft flourishes in Putin’s Russia.

Faced with widespread suspicion that sleaze remains rampant, Putin has responded by declaring war on corruption. In November, he said: “We will tear out this infection from its roots.” In December, he ordered the creation of a “counter-corruption directorate,” according to a Kremlin announcement.

Opponents of Putin have been levelling charges of cronyism and favouritism against him for years. What they haven’t done is detail how the president’s associates actually extract money from the government.

In the hospital project, significant sums ended up in the hands of intermediaries with links to Putin: profits that could have provided additional facilities or badly needed services in Russia.

The two associates of Putin who supplied medical equipment acted as middlemen in deals with the Russian state worth at least $195 million. They made profits by buying high-tech medical equipment through a British company they controlled and selling it on to Russia at much higher prices - sometimes double the market rate.

Much of the equipment came from the German multinational Siemens AG. Siemens sold its products to the British company, which then sold the equipment on to Russia – and some of those imports fetched prices at or above those described by Medvedev as “cynical, loutish theft.”


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PROJECT HEALTH: Putin visits a new heart hospital in Penza in 2008. The hospital was part of Moscow’s push to spend more on health and education. REUTERS/Sergei Karpukhin


A GRAND PROJECT

Healthcare, Putin himself has said, is one of the most pressing issues facing post-Soviet Russia.

Life expectancy at birth plunged after the fall of the Soviet Union, hitting 65 in 2002 – down from 69 in 1989. Though it recovered to 69 in 2011, according to World Bank figures, it remains well below Western nations such as Britain and the United States, where life expectancies were 81 and 79 that year. Since Putin came to power, Russia’s population has declined to 143 million from 147 million.

Putin saw the need for improvements. In 2005, then in his second term as president, he initiated plans to spend $1 billion to build and equip 15 high-tech hospitals across Russia. His National Project Health was one of several efforts he said were vital to lift the quality of life for ordinary Russians. New clinics for emergency, heart and prosthetic patients were planned from Vladivostok in the east to Kaliningrad on the Baltic.

“It is a guarantee against the sloppy eating up of resources without any discernible results,” Putin said.

What Putin did not announce was that two of his associates became involved in constructing and equipping some of the hospitals.

One was a former dentist called Nikolai Shamalov, a well-built, strong-willed man now in his sixties. He knew Putin from their days in St. Petersburg, where the future president was a powerful city official. One of Shamalov’s sons worked for Putin’s department in the city’s administration.

Shamalov and Putin were also among a small group of men who founded an exclusive lakeside development of dachas north of the city known as the Ozero Cooperative. Shamalov grew rich through a stake in Bank Rossiya, a St. Petersburg company that expanded rapidly after Putin moved to Moscow and became president in 2000. He also worked as a top Russian sales executive for Siemens - a major producer of medical equipment.

The other associate in the hospital project was Dmitry Gorelov, who graduated from a military medical academy in 1973. Gorelov, described by one associate as a thoughtful man who is keen on photography, was also a shareholder in Bank Rossiya until June 2013. In 2000, Gorelov was granted the title of “honoured healthcare practitioner of the Russian Federation” in a presidential decree issued by Putin.

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A third key figure in the tale of the hospital deals and the Black Sea estate is Sergei Kolesnikov, a former business associate of Shamalov and Gorelov. A biologist by training, Kolesnikov said he helped Shamalov manage an investment company; he was also a shareholder with Gorelov in a healthcare company. His roles, he said, gave him deep insight into the two men’s association with the president as well as knowledge of the hospital and Black Sea deals.

For instance, Kolesnikov said, the two were guests at the leader’s 55th birthday party in 2007. “They were at his birthday; they told me about it,” Kolesnikov said in an interview in Estonia, where he now lives. He said Shamalov and Gorelov were also guests at parties held at Valdai, a secluded presidential residence between Moscow and St. Petersburg.

Independently of Kolesnikov, flight details seen by Reuters may underscore the proximity of Shamalov and Gorelov to Putin.

In 2008, the two businessmen travelled on a small private plane from Prague to the Russian resort of Sochi with Alina Kabayeva, a former Olympic gymnast described by some Russian media as having been Putin’s girlfriend. At the time the president, who was then still married, denied he had a relationship with Kabayeva and told journalists to keep their “snotty noses” out of his private life. Kabayeva declined to comment.

lso on the plane, according to the flight information, was Vladimir Kozhin, a senior Kremlin official who was sanctioned by the U.S. Treasury in March. Asked about the flight, Kozhin said he would not respond to speculation.

In 2010 Kolesnikov wrote an open letter to then-President Medvedev,claiming that Shamalov was building a luxury estate for Putin by the Black Sea. Kolesnikov said in his letter that he didn’t have a direct role in managing the palace project. The operation, he said, was run by Shamalov, but it drained funds from other projects that Kolesnikov oversaw. The letter said Kolesnikov knew about the project’s costs because of “detailed reports and budgets” he reviewed during his work with Shamalov.

Shamalov did not respond to questions for this article. Gorelov, asked about his role in companies involved in Putin’s healthcare project, told Reuters: “The achievements of modern medicine until recently were accessible only for inhabitants of the largest megalopolises of Russia, mainly Moscow and St. Petersburg. The aim of the project was to provide an opportunity for inhabitants of other regions of the country, in particular Siberia and the Far East, to receive highly specialised treatment with the use of the latest advances of medical sciences.”

A spokesman for Putin did not respond to questions about Kolesnikov’s claims. The Kremlin has previously dismissed Kolesnikov as an aggrieved man, saying he left Russia because of business disputes. Kolesnikov said he left Russia because he “decided to do something for my country” by speaking out about corruption.

http://cdscdn.reuters.com/r04//1/6/...4-608x342-25-200-650000-aac-1-44100-96000.mp4

THE MIDDLEMEN

Gorelov was well placed to arrange a deal to equip Putin’s health project. He was a co-founder of a St. Petersburg company called Petromed that was set up in the early 1990s to provide medical equipment for the region. Among the providers of seed capital was the city’s external affairs committee - which was then run by Putin.

Kolesnikov became a shareholder in the company with Gorelov, and the two remain shareholders, corporate filings show.

Shamalov, meanwhile, was regional head of sales for the medical equipment division of Siemens, which supplied high-tech systems, such as scanners. He had worked for the company since the 1990s, according to former colleagues.

Asked about Shamalov, a spokesman for Siemens said he left the company “effective October 1st in 2008.”

Between 2006 and 2008, the Russian federal agency Technointorg, which was general contractor for the national health project, granted Petromed the right to supply equipment to 14 of Putin’s new hospitals. After Technointorg ran into problems, Petromed ended up supplying only eight completed hospitals.

It is not clear exactly how much the state paid Petromed in total. But court documents show the company was awarded $120 million in relation to five of the hospitals. And records from a person in the Russian Customs Service indicate Petromed imported more than $205 million worth of medical equipment in 391 consignments from 2005 to 2010.

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GATHERING: Businessman Sergei Kolesnikov (far right) says two associates of Putin, Nikolai Shamalov and Dmitry Gorelov (centre left and centre right), used profits from state projects to help build a mansion later dubbed “Putin’s palace.” Kolesnikov verified the people in this photo, which appeared on a Russian website. Reuters is unable to independently verify the location, source or date of the image.


The data shows most of this equipment, by value, came from Germany (65 percent) and the United States (25 percent). Siemens, which has production facilities in the United States as well as Germany, was the biggest supplier. It sent goods that included computerised X-ray machines and medical scanners.

INDIRECT ROUTE

The equipment was delivered straight from Siemens to Petromed, the importer acting on behalf of the Russian state. But payment did not go straight from Petromed to Siemens.

Instead, the money took a more circuitous route, involving a second intermediary - one controlled by Shamalov and Gorelov, according to Kolesnikov.

According to the customs data, Petromed paid $195 million to a British company called Greathill Ltd. Greathill acted as an intermediary in buying equipment from Siemens and other suppliers.

The arrangement worked like this: The Russian state paid Petromed to supply medical equipment. Meanwhile, Greathill bought equipment from Siemens and other suppliers, according to Kolesnikov. In turn, Petromed bought the equipment from Greathill at much higher prices, up to double the going rate, according to customs documents. Bank records seen by Reuters support that account.

Kolesnikov said he helped set up Greathill on behalf of Shamalov and Gorelov. A trail of documents reviewed for this article suggests that Greathill was an equipment supplier only on paper. According to Kolesnikov, Greathill’s real function was to act as an intermediary “where profits could be made.”

Gorelov said it was normal practice to use such a company for big projects and that it had a “highly positive effect for the realisation of the project.” He said Greathill’s business was “absolutely transparent.”

Corporate documents list Greathill as having a headquarters office in the town of Rochdale in northern England. At the address is a firm of accountants. The firm said Greathill was a client for which it provides a registered office. A spokeswoman for the accountants said she knew nothing more about Greathill’s business.

Greathill doesn’t disclose who really runs and owns the company. It uses so-called nominee directors - people appointed by shareholders to represent their interests on a corporate board - from another firm of accountants in the southern English county of Essex. And it lists companies managed by the same firm of accountants as its shareholders.

A manager at the Essex accounting firm confirmed to Reuters that it administered Greathill. He said the companies listed as Greathill’s shareholders were, most likely, nominees - in other words, entities acting on behalf of others. “A nominee company is just acting as a front,” he said. “So they are holding shares on behalf of a third party. But they are not the legal owners of the shares.”

According to Kolesnikov and documents reviewed by Reuters, Greathill was owned by Shamalov and Gorelov.

Copies of agreements seen by Reuters indicate that Shamalov and Gorelov each hired a Swiss trust company called Interis to acquire stakes in Greathill on their behalf – 50 percent each. Interis and Shamalov declined to comment.

A spokesman for Siemens said the German manufacturer was unaware of Shamalov having any involvement in Greathill.

“The company Greathill was a business partner of Siemens Healthcare until 2010. Siemens has no information to the effect that a Siemens employee was invested either in Greathill or Petromed,” the spokesman said.

Evidence that Greathill sold Siemens products to Petromed at large mark-ups appears in customs records reviewed by Reuters.

They show that between September 2007 and August 2008, Greathill acquired at least four Siemens Somatom Sensation 64 CT scanners. Greathill then sold the machines to Petromed for 1.9 million euros to 2 million euros each, which customs documents recorded as the equivalent of $2.7 million to $3 million at the prevailing exchange rates.

The prices are nearly double the typical price charged by suppliers for CT scanners in the same technological class, including those made by Siemens, according to a 2010 investigation by the Kremlin into sales of medical equipment.

Several people involved in the sale of medical gear in Germany told Reuters that hospitals in Germany and elsewhere could buy the same Siemens scanners in 2007-2008 for between 1 million and 1.2 million euros, depending on the extras included.

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NEW BUILD: In 2010, Kolesnikov claimed that a luxurious estate near the Black Sea was for Putin. A Russian website published pictures, including the one above, which it said were of the mansion. The Kremlin denied Putin had anything to do with the building. Reuters is unable to independently verify the authenticity, content, location, source or date of this photograph.

Customs records also show that Greathill sold Petromed a Siemens Avanto MRI scanner for more than 3 million euros, which the records say was the equivalent of 130 million roubles. Greathill sold Petromed another seven of the machines, all for more than 2.6 million euros each. German experts said the typical price of such equipment was 1.2 million to 1.7 million euros apiece.

“One hundred and thirty million roubles is a clearly inflated price,” said Alexei Popov, a Russian surgeon who has researched the pricing of medical scanners. “The approximate price for this is up to 80 million to 85 million roubles – that’s with all the bells and whistles.”

Petromed made no comment on the deals. Its general director, Enver Useinov, said he had only been in his post a year and knew nothing of Greathill. “I can’t say anything,” he said. “I don’t know.”

In a written response to Reuters, Gorelov said Petromed had secured equipment at competitive prices, and that those supplies and prices were approved by government experts.

TO RUSSIA, WITH MONEY

Not far from the Black Sea coast of southern Russia stands an imposing property, built in neo-classical style with formal gardens. The sprawling estate, near the resort of Gelendzhik, looks fit for a tsar and includes a theatre and helicopter landing pad. This is the property popularly known as “Putin’s palace.”

How did money from Putin’s project to buy scanners for Russian hospitals end up in a property that has nothing to do with medical care?

There were three key steps. First, Petromed paid money to Greathill. Then, Greathill sent at least $56 million to the Swiss bank accounts of a Belize company. Finally, the Belize company sent funds to a firm registered in Washington, DC.

That firm, Medea Investment, received at least $48 million for supplying building materials for the “Putin palace” property. According to Kolesnikov, Medea’s owner was an Italian architect, Lanfranco Cirillo, who designed the building. (For details on how Reuters traced the money trail, see related story below.)

THE FALLOUT

Through his spokesman, Putin has denied having any connection to the Black Sea property. Far from enjoying a luxurious mansion, he has limited wealth, according to an official report of his assets.

In December 2011, an official statement of his income showed that he had earned 17.73 million roubles ($539,000) in four years – an average of $135,000 a year. He owned only one home, a modest apartment, according to the statement.

That same year, following Medvedev’s orders to punish people responsible for overpricing medical scanners, Russia’s prosecutor general said 68 criminal cases had been launched in 45 regions of the country.

In the Volga River city of Ulyanovsk, for example, the regional health minister, two businessmen and a senior doctor were prosecuted in a case concerning the purchase of a Siemens Emotion 6 scanner in 2008. The minister was sentenced to 8.5 years in prison. The businessmen got seven years. The doctor received a suspended sentence of three years.

The price paid for the scanner was 44 million roubles (equal to $1.7 million at the time). The court’s ruling, signed by the judge, described this price as “deliberately inflated.”

Even so, it was a bargain compared to what the president’s associates charged.

According to customs records, Greathill reaped 61 percent more - 71 million roubles - for selling Petromed the very same model.

From Comrade Capitalism
 
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When Putin ordered up new hospitals, his associates botched the operation

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MEDICAL KIT: A new hospital in Perm, some 1,150 km (720 miles) east of Moscow, pictured in January. The facility, opened in February 2012, was part of Moscow’s push to spend more on areas such as health and education. REUTERS/Maxim Kimerling

PERM, Russia - At the foot of the Ural Mountains stands a symbol of how even the best intentions in Russia can enable well-connected individuals to bleed money from the state. It’s a modern hospital built in this industrial city of a million people, and intended to be a flagship of a grand project to improve the country’s healthcare.

The hospital’s chain-smoking director, Sergei Sukhanov, loves his new facility, the Federal Centre for Cardiovascular Surgery, which has beds for 167 patients. He also admires Russian President Vladimir Putin, who championed the hospital and whose letter of thanks to the surgeon adorns his office.

“It’s a huge gift to the Perm region,” said Sukhanov in his new white office. “It’s like we’ve moved from a one-bedroom apartment to a five-bedroom apartment.”

But a Reuters investigation shows the hospital, and a $1 billion construction project of which it was part, were also business opportunities for Putin’s allies. While it isn’t clear whether they managed to turn a profit, their involvement cost Russian taxpayers dearly.

A previous article detailed how two associates of Putin profited from selling high-tech medical equipment to the Russian state and sent money to Swiss bank accounts linked to the building of a lavish estate near the Black Sea.

Those two men, Nikolai Shamalov and Dmitry Gorelov, also had stakes in two companies that received contracts to build a series of hospitals around Russia. The undertaking later led to accusations of “unjust enrichment” against one of the companies. That company ended up going bust, owing around 860 million roubles ($26 million) to the state. Hundreds of people lost their jobs.

Corporate records show there was another major investor in the two building companies: Rosinvest, a Russian investment firm owned by offshore entities.

In 2010 Sergei Kolesnikov, a businessman who used to work with the two Putin associates, went public with a claim that Rosinvest was ultimately controlled by the Russian leader himself. The role of Rosinvest in Putin's $1 billion health project, however, hasn't been previously reported.

Kolesnikov says that Putin owned an offshore entity called Lirus Investment Holding, which had ultimate control of Rosinvest. He told Reuters that he knew this because he “participated in the creation” of Lirus. Lirus was a Liechtenstein company that, he said, was owned through bearer shares - securities that don’t record the name of the owner.

Putin owned 94 percent of the company, Kolesnikov said, while he, Shamalov and Gorelov owned 2 percent each. Kolesnikov said he was informed by both Gorelov and Shamalov 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,” Kolesnikov said.

Kolesnikov said he helped to manage a portfolio of investments through Rosinvest on behalf of Shamalov, Gorelov and himself. But the prime beneficiary, he said, was Putin. Kolesnikov said he delivered reports about the investments to Shamalov, and that Shamalov presented them to Putin.

Putin’s ownership role in the project couldn’t be confirmed. The Kremlin did not respond to Reuters questions about Rosinvest, which was liquidated in 2012. In the past, Putin’s spokesman, Dmitry Peskov, has firmly denied any connection between Putin and Rosinvest.

Shamalov and Gorelov did not respond to requests for comment on Kolesnikov’s account.

This series examines Russian capitalism in the Putin era. A complex system of reward and obligation has operated among the elite since Putin gained power in 2000, with associates of the president tapping into the flow of funds from state coffers. In addition to breeding corruption, this system carries another cost: bungling and waste.

russia2graphica.png

The project to create the string of hospitals wound up costing about $700 million more than Putin called for and delivered two fewer hospitals than planned. A state agency involved in steering the project went under, leaving behind debts of $300 million.

The hospital money would have been better spent on simple outpatient healthcare than on high-tech facilities, some Russian healthcare specialists said. Despite a large number of state-run hospitals and an army of doctors, many Russians only get access to the healthcare they need by paying private clinics or bribing state doctors.

Overall, Russians have seen only limited advances in the nation’s medical care. Public-sector health spending in Russia remains low compared with the United Kingdom and other countries with government-financed healthcare: It equalled 3.7 percent of economic output in 2011, according to the World Bank. UK public spending on health was 7.7 percent of economic output that year.

In the case of Putin’s hospital scheme, say some specialists, Russian taxpayers overpaid for trophy structures that don’t address the underlying causes of the nation’s health crisis.

“These projects are just about PR,” said Kirill Danishevsky, a doctor and professor at Moscow’s Higher School of Economics specialising in healthcare. “Russia didn’t need new hospitals, and we certainly didn’t need the number of scanners they bought. What Russia needs is primary healthcare.”

A SHARE OF THE ACTION

It was in 2005 that Putin, then in his second term as president, initiated plans for Russia to spend $1 billion on 15 new medical centres for emergency, heart and prosthetic patients in cities spread across Russia, from Vladivostok in the east to Kaliningrad on the Baltic.

Russian officials hired Cadolto, a German company skilled in a modular building technology, to provide the building blocks for seven centres. Officials granted the company a contract worth $270 million.


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AILING: A patient in a hospital in the town of Tver, some 170 km (106 miles) northwest of Moscow, in 2011. Russia’s health indicators, and many of its facilities, lag behind those in Europe and elsewhere. REUTERS/Diana Markosian

But Putin insisted that some modules be built in Russia, not Germany, according to a Cadolto manager and Russian sources. That’s where Shamalov and Gorelov came in. They were associates of Putin and, as detailed in a previous article, they supplied scanners to the hospitals at what some medical professionals said were inflated prices.

Corporate records show the two men held stakes in two other companies that got involved in Putin’s health project. These companies planned to build the next wave of medical centres, according to a former senior official overseeing the process and other sources familiar with the companies.

The first was Rosmodulstroi, set up to build and own a module factory. The second company was St. Petersburg-based UK Modul, set up to manage the factory and handle contracts for supplying the modules to Putin’s hospital project. Rosinvest - which Kolesnikov alleges was controlled by Putin - was a major investor in both companies. (For more on the ownership trail, see related story.)

SHUT DOWN

The German contractor Cadolto began to supply modules for local Russian contractors to put up the first seven hospitals. Meanwhile, the Russians set up a factory in Cherepovets, a city about 530 km (330 miles) north of Moscow, to produce their own modules.

UK Modul got an initial contract from a Russian state agency in July 2008 to supply half the modules for a hospital in the city of Chelyabinsk.


russia2graphicc.png


In September 2009, the Russian state designated $448 million for the construction of another five federal medical centres in addition to those being built with Cadolto’s modules. Days later, DEZZ, the state agency then overseeing the health project, signed a further contract with UK Modul, according to court documents.

Details of that UK Modul contract are not publicly available, and the court records don’t specify the projects involved or the value of the deal.

The company appears to have won a role in building half a dozen of the hospitals, however. Vadim Mozhaev, who was head of DEZZ at the time, told Reuters that UK Modul was given a contract for building “five or six (medical) centres.” A St. Petersburg company, moreover, said on its website that it prepared project estimates for UK Modul for the Perm hospital and five other federal hospitals.

DEZZ later updated its arrangements with UK Modul, specifying $97 million for the hospital at Perm, according to court documents. It also signed another contract with UK Modul for $15 million for supplying modules for a hospital at Smolensk.

UK Modul failed to complete either project. In fact, it fulfilled its assignment at just one of the half-dozen hospitals it was engaged to build.

The Perm job was a conspicuous flop. It took UK Modul more than a year to deliver all the modules, said Vladimir Sodomov, former deputy director of economics and procurement at Perm’s Heart Institute, who helped oversee the building.


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GOOD HEALTH: Nikolai Shamalov was one of two wealthy Putin comrades to win contracts to build a series of hospitals. The undertaking saw a private firm the men co-owned go bust. Businessman Sergei Kolesnikov verified the person in this photograph, which appeared on a Russian website. Reuters is unable to independently verify the location, source or date of the photograph.


The prefabricated blocks were meant to be put together like Lego bricks, but didn’t fit because UK Modul had used the wrong plans, said one former executive at the company.

“The holes weren’t in the right place. The modules should fit together and onto the foundations perfectly, but they didn’t,” said the former executive, who declined to be named because he still works in the industry. “They (UK Modul) had no expertise.”

The problems were eventually resolved by another company, and the Perm hospital was completed in February 2012, almost a year after UK Modul had been replaced.

Shamalov did not respond to written requests for comment. Gorelov declined to be interviewed, but sent a written statement in which he said: “I was a passive shareholder in the indicated companies. The business ideology and direct management of their activities was carried out by other shareholders, members of the board of directors and the directors of the companies. In connection with this I don’t have information about the questions that interest you.”

Several former managers and employees at UK Modul said the Russian state was partly to blame for the Perm fiasco, because it did not pay bills on time.

In February 2011, Viktor Rusanov took over as head of DEZZ, the agency overseeing the hospital project. He told Reuters that UK Modul failed to deliver on agreed tasks and “wanted yet more money.”

As problems mounted with UK Modul’s work on the Perm hospital, DEZZ cut back UK Modul’s state contracts. Eventually, in March 2011, it cancelled them altogether.

Workers who turned up at the Cherepovets factory in March 2011 were greeted with a curt notice informing them it was closed. A subsequent letter from management told them that UK Modul had lost its government financing, leaving the company unable to pay wages and forcing it out of business.

“Six hundred people worked in the factory, and they were simply chucked on the street,” Gennady Smirnov, one of the workers, told Reuters.

Smirnov said he and many other workers were not sent vital labour documents enabling them to seek work elsewhere or claim unemployment benefits. He said he was left out of work for a year and had to borrow money from his mother-in-law to pay the mortgage on his apartment.

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OPENING CEREMONY: Sergei Sukhanov, head of Perm Medical Centre, at its opening in February 2012. The hospital was a flagship of a grand project to improve the country’s health care. REUTERS/Maxim Kimerling

LATE AND EXPENSIVE

Given the chaotic end to the efforts of Rosmodulstroi and UK Modul, it is hard to tell whether their shareholders made a profit on Putin’s hospitals. What is clear is that the state felt it received poor value for money - so much so that it sued UK Modul for damages.

The president’s associates managed to complete just one of their half-dozen hospital projects, according to former UK Modul insiders - the deal to provide half the modules for the Chelyabinsk hospital.

In the end, Russia imported more modules and built 13 of the planned 15 hospitals in Putin’s grand health project. It took around five years longer than envisaged. Cadolto, unlike UK Modul, met its contracts and there is no suggestion it was responsible for any delays.

The final cost to the Russian federal government for the project was about 70 percent more than first budgeted: $1.69 billion, according to official documents seen by Reuters.

UK Modul wasn’t the only problem. Two hospitals in which UK Modul wasn’t involved failed completely. The hospital at Krasnodar was knocked down because mould ruined the modules after they had been installed. Another at Vladivostok was cancelled after delays and cost overruns.

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It was left to Russian taxpayers to clear up the mess.

Technointorg, a state organisation that oversaw the early phases of the hospital building programme and the supply of medical equipment, ended up going bankrupt in September 2013. It left debts of more than $300 million.

Its successor, DEZZ, sued UK Modul over its $97 million contract to build the Perm hospital.

Judges upheld that claim and ordered UK Modul to pay $22 million. More than half of the amount was for "unjust enrichment" for failing to meet its obligations in terms of deadlines and standards, according to documents from the Moscow commercial court.

UK Modul never made good on that money. The company went bankrupt in May 2012. Its assets, worth $26 million on paper, fetched $40,000.

Russia’s Ministry of Health did not answer questions about the financing and construction of the hospitals. But in a written statement it said: “Realising the measures of the priority national project in the area of Healthcare actively encourages improvement of the demographic situation. The development of specialised, including high-technology, medical aid is one of the basic directions of the activity of the Ministry of Health and Social Development of the Russian Federation.”

Dashinevsky, the professor at the Higher School of Economics, said Russia’s health system has suffered chronic underfunding for the last 10 to 15 years and become increasingly riddled with corruption and inefficiency. The botched hospital programme, he said, helps explain why.

“Healthcare is just one typical sector of the Russian economy. There is no special disease of healthcare,” he said. “It’s a general disease of the state.”

From Comrade Capitalism
 
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@SvenSvensonov Excellent series, thank you. What a pleasure it is to read long-form investigative journalism, which is all too rare these days. Some thoughts, though not necessarily related to each other except through the overall theme of corruption in Russia today:

-When Russia interferes with countries through bribery and troops, it's protecting the rights of the people. When the West does it, it's imperialism.

-David Goldman, who writes under the nom de plume of "Spengler" at the Asia Times presciently predicted in 2008 (and then again in 2013) that Russia would try to solve its demographic problem by taking the the Russian-populated territories of Ukraine, Belarus, and Kazakhstan to increase the Russian population under Russia's control. Georgia was the template. All the political wrangling over the legitimacy of the Ukrainian government has been cover for this project, and we can expect to see more moves along these lines in the future.

-A friend of mine who works in Moscow once speculated that the reason why Putin maneuvers so much to stay in power is that as soon as he loses power, he is essentially a dead man, for his successor will do to him what he has done to his enemies (Khodorkovsky, Litvinenko, etc.)

-Yet another argument for why strong, efficient institutions are far more important to a successful society than the veneer of democracy. The article hints at why corruption is able to flourish in Russia today: "Several former managers and employees at UK Modul said the Russian state was partly to blame for the Perm fiasco, because it did not pay bills on time." Doesn't pay bills on time, doesn't make decisions in a timely manner... it's easy to see how an otherwise honest businessman might "provide an incentive" to a Russian bureaucrat to ensure that the state does its job correctly and quickly, which would be otherwise unnecessary in a country with more professional standards

-Russia certainly has done better under Putin than Yeltsin, but the main difference I see is that the corruption is less chaotic and more focused, but probably still of the same magnitude. As one of the article states, the way to make money has shifted from grabbing state assets to doing business with the state, which doesn't seem to be a material improvement in my eyes.

In any case, how sad and unfortunate for the Russian people. Russia could have easily gone the way of Poland, which also enacted "shock therapy" reforms after the end of communism, and is now one of the most successful countries in Europe. Instead, Russians must steel themselves with cynicism to deal with the continued failures of the state. Dealing with the opaque leadership in China and letting the corrupt rentier system continue is far easier than the economic reform necessary for better relations with Europe; it's clear that true friendship between Russia and the West was never in the cards, so the idea that we "lost Russia" is misplaced.

Finally, how can Russia expect to break the reign of the USD as the global reserve currency when their state is in such a shambles?
 
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-When Russia interferes with countries through bribery and troops, it's protecting the rights of the people. When the West does it, it's imperialism.

Well it is subjective, isn't it?

That's why I prefer the Realpolitik view, where geopolitics is based on things like hard power (economic + military).
 
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Well it is subjective, isn't it?

That's why I prefer the Realpolitik view, where geopolitics is based on things like hard power (economic + military).

Certainly, that was just my snarky comment mocking those on PDF (including Russian and Chinese nationalists) who believe American only acts out of evil intent, but their own countries only act out of noble intent. I agree with you, that all geopolitics is based on national interest.
 
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Certainly, that was just my snarky comment mocking those on PDF (including Russian and Chinese nationalists) who believe American only acts out of evil intent, but their own countries only act out of noble intent. I agree with you, that all geopolitics is based on national interest.

You are right sir. :tup:

How do you think Russia's system is going to cope with the falling oil prices by the way?
 
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I wonder why not put same attention to the likes of Poroshenko/Timoshenko/"our man "Yats/Kolomoiski etc in your quest to throw dirt in typical USA manner at its competitors?Dont fit the narrative eh?Public is forbidden to know what they are doing in Ukraine like now right?All in the name of "democracy" of course.
 
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You are right sir. :tup:

How do you think Russia's system is going to cope with the falling oil prices by the way?

In a certain sense, this crisis presents a great opportunity for Russia to restructure and diversify its economy. Russia has already tried the easy solution (gas deal with China), but since that will not compensate for the loss of trade with Europe due to the Crimea sanctions, it needs its export industries to become more competitive. I don't have specific details about the industrial sector, but I know that the Russian financial sector is becoming increasingly sophisticated, which in turn should help the other sectors of the Russian economy.

That said, Russia really needs to crack down on corruption. I posted last week about Putin's announced intention to tackle corruption, but I'm too cynical to trust that without seeing results first. Xi's corruption crackdown is earning him the political capital necessary to restructure the Chinese economy, but will Putin be able to do the same? The jury is still out. The crisis will help concentrate minds, however--no more white elephants like the $50bn splurge on the Sochi Olympics, that's for sure. As the apocryphal Churchill quote goes, "Gentlemen, we have run out of money. It is time to start thinking."

For the sake of argument, let's suppose Putin is successful, and corruption is greatly diminished. Then industry will need to become more productive, which, sad to say, is a tall order for the former core of the USSR. Other than a handful of companies like Yandex and Kaspersky, can you think of any global Russian brands? Russia needs to move beyond its defense-based business links in Asia, Africa, and the Arab world, and start extending its efforts to the consumer and business-to-business market.

Russians have the intelligence, talent, and ambition to achieve this--I know from personal experience, having dealt with some brilliant Russians. But will the state be behind them, supporting their efforts, or will it be an obstacle that must be overcome? For too long it's been an obstacle, so for Russia's sake, let's hope there's a statesman (if not Putin) who rises to the challenge.

It won't be easy. China had a far-sighted and focused leadership that enabled China to accomplish this task; even if the CCP is corrupt, it has kept corruption below the threshold of dragging down the economy. Not so with Russia. China is rightfully proud of its ability to build global champions, but in many cases, China had no choice because of sanctions. In other cases, China imposed tariffs to protect its industries and buy them time. But even in China's case, if these domestic champions cannot compete globally, they are doomed, and the Chinese consumer will suffer (because a more efficient/cheaper global competitor's products are unavailable to the Chinese consumer). Russia, meanwhile, seems to have been more internally focused on dividing the spoils of national assets and how to smuggle capital out of the country than on the serious business of moving the entire country forward.

Russia needs to adopt the same mindset as China, instead of relying on its insular business culture that depends on corruption, and perpetuates corruption. For too long, Russian businesses have been geared exclusively towards Russia, but Russia should take advantage of these sanctions to realize that it cannot rely on commodity exports forever. This will kill two birds with one stone: it will enable businesses to move away from the toxic business culture that has infected Russia, and because they won't be able to bribe their way to success in other countries, they will be forced to adopt world-class standards and improve their productivity.

To get back to your question, how will Russia deal with the falling oil prices: the pain cannot be avoided, and Russia will probably suffer for 3-5 years because of it. So it's more a matter of endurance than "dealing with" the problem. However, if it acts now, even with sanctions in place, I believe it can limit the damage and use its USSR-era connections in Asia and Africa (and possibly South America) to trade its way out of its trouble. China's capital injections and consumption of Russian commodity outputs will soften the blow, but it won't be enough. Even before the sanctions, Russia's economy was starting to weaken, and the drop in oil prices has nothing to do with the sanctions, so Russia would have suffered anyway. If the sanctions are eventually lifted, that's icing on the cake, but Russia needs to be prepared in case they are not.
 
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When Putin ordered up new hospitals, his associates botched the operation

View attachment 157308

MEDICAL KIT: A new hospital in Perm, some 1,150 km (720 miles) east of Moscow, pictured in January. The facility, opened in February 2012, was part of Moscow’s push to spend more on areas such as health and education. REUTERS/Maxim Kimerling

PERM, Russia - At the foot of the Ural Mountains stands a symbol of how even the best intentions in Russia can enable well-connected individuals to bleed money from the state. It’s a modern hospital built in this industrial city of a million people, and intended to be a flagship of a grand project to improve the country’s healthcare.

The hospital’s chain-smoking director, Sergei Sukhanov, loves his new facility, the Federal Centre for Cardiovascular Surgery, which has beds for 167 patients. He also admires Russian President Vladimir Putin, who championed the hospital and whose letter of thanks to the surgeon adorns his office.

“It’s a huge gift to the Perm region,” said Sukhanov in his new white office. “It’s like we’ve moved from
a one-bedroom apartment to a five-bedroom apartment.”

But a Reuters investigation shows the hospital, and a $1 billion construction project of which it was part, were also business opportunities for Putin’s allies. While it isn’t clear whether they managed to turn a profit, their involvement cost Russian taxpayers dearly.

A previous article detailed how two associates of Putin profited from selling high-tech medical equipment to the Russian state and sent money to Swiss bank accounts linked to the building of a lavish estate near the Black Sea.

Those two men, Nikolai Shamalov and Dmitry Gorelov, also had stakes in two companies that received contracts to build a series of hospitals around Russia. The undertaking later led to accusations of “unjust enrichment” against one of the companies. That company ended up going bust, owing around 860 million roubles ($26 million) to the state. Hundreds of people lost their jobs.

Corporate records show there was another major investor in the two building companies: Rosinvest, a Russian investment firm owned by offshore entities.

In 2010 Sergei Kolesnikov, a businessman who used to work with the two Putin associates, went public with a claim that Rosinvest was ultimately controlled by the Russian leader himself. The role of Rosinvest in Putin's $1 billion health project, however, hasn't been previously reported.

Kolesnikov says that Putin owned an offshore entity called Lirus Investment Holding, which had ultimate control of Rosinvest. He told Reuters that he knew this because he “participated in the creation” of Lirus. Lirus was a Liechtenstein company that, he said, was owned through bearer shares - securities that don’t record the name of the owner.

Putin owned 94 percent of the company, Kolesnikov said, while he, Shamalov and Gorelov owned 2 percent each. Kolesnikov said he was informed by both Gorelov and Shamalov 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,” Kolesnikov said.

Kolesnikov said he helped to manage a portfolio of investments through Rosinvest on behalf of Shamalov, Gorelov and himself. But the prime beneficiary, he said, was Putin. Kolesnikov said he delivered reports about the investments to Shamalov, and that Shamalov presented them to Putin.

Putin’s ownership role in the project couldn’t be confirmed. The Kremlin did not respond to Reuters questions about Rosinvest, which was liquidated in 2012. In the past, Putin’s spokesman, Dmitry Peskov, has firmly denied any connection between Putin and Rosinvest.

Shamalov and Gorelov did not respond to requests for comment on Kolesnikov’s account.

This series examines Russian capitalism in the Putin era. A complex system of reward and obligation has operated among the elite since Putin gained power in 2000, with associates of the president tapping into the flow of funds from state coffers. In addition to breeding corruption, this system carries another cost: bungling and waste.

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The project to create the string of hospitals wound up costing about $700 million more than Putin called for and delivered two fewer hospitals than planned. A state agency involved in steering the project went under, leaving behind debts of $300 million.

The hospital money would have been better spent on simple outpatient healthcare than on high-tech facilities, some Russian healthcare specialists said. Despite a large number of state-run hospitals and an army of doctors, many Russians only get access to the healthcare they need by paying private clinics or bribing state doctors.

Overall, Russians have seen only limited advances in the nation’s medical care. Public-sector health spending in Russia remains low compared with the United Kingdom and other countries with government-financed healthcare: It equalled 3.7 percent of economic output in 2011, according to the World Bank. UK public spending on health was 7.7 percent of economic output that year.

In the case of Putin’s hospital scheme, say some specialists, Russian taxpayers overpaid for trophy structures that don’t address the underlying causes of the nation’s health crisis.

“These projects are just about PR,” said Kirill Danishevsky, a doctor and professor at Moscow’s Higher School of Economics specialising in healthcare. “Russia didn’t need new hospitals, and we certainly didn’t need the number of scanners they bought. What Russia needs is primary healthcare.”

A SHARE OF THE ACTION

It was in 2005 that Putin, then in his second term as president, initiated plans for Russia to spend $1 billion on 15 new medical centres for emergency, heart and prosthetic patients in cities spread across Russia, from Vladivostok in the east to Kaliningrad on the Baltic.

Russian officials hired Cadolto, a German company skilled in a modular building technology, to provide the building blocks for seven centres. Officials granted the company a contract worth $270 million.


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AILING: A patient in a hospital in the town of Tver, some 170 km (106 miles) northwest of Moscow, in 2011. Russia’s health indicators, and many of its facilities, lag behind those in Europe and elsewhere. REUTERS/Diana Markosian

But Putin insisted that some modules be built in Russia, not Germany, according to a Cadolto manager and Russian sources. That’s where Shamalov and Gorelov came in. They were associates of Putin and, as detailed in a previous article, they supplied scanners to the hospitals at what some medical professionals said were inflated prices.

Corporate records show the two men held stakes in two other companies that got involved in Putin’s health project. These companies planned to build the next wave of medical centres, according to a former senior official overseeing the process and other sources familiar with the companies.

The first was Rosmodulstroi, set up to build and own a module factory. The second company was St. Petersburg-based UK Modul, set up to manage the factory and handle contracts for supplying the modules to Putin’s hospital project. Rosinvest - which Kolesnikov alleges was controlled by Putin - was a major investor in both companies. (For more on the ownership trail, see related story.)

SHUT DOWN

The German contractor Cadolto began to supply modules for local Russian contractors to put up the first seven hospitals. Meanwhile, the Russians set up a factory in Cherepovets, a city about 530 km (330 miles) north of Moscow, to produce their own modules.

UK Modul got an initial contract from a Russian state agency in July 2008 to supply half the modules for a hospital in the city of Chelyabinsk.


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In September 2009, the Russian state designated $448 million for the construction of another five federal medical centres in addition to those being built with Cadolto’s modules. Days later, DEZZ, the state agency then overseeing the health project, signed a further contract with UK Modul, according to court documents.

Details of that UK Modul contract are not publicly available, and the court records don’t specify the projects involved or the value of the deal.

The company appears to have won a role in building half a dozen of the hospitals, however. Vadim Mozhaev, who was head of DEZZ at the time, told Reuters that UK Modul was given a contract for building “five or six (medical) centres.” A St. Petersburg company, moreover, said on its website that it prepared project estimates for UK Modul for the Perm hospital and five other federal hospitals.

DEZZ later updated its arrangements with UK Modul, specifying $97 million for the hospital at Perm, according to court documents. It also signed another contract with UK Modul for $15 million for supplying modules for a hospital at Smolensk.

UK Modul failed to complete either project. In fact, it fulfilled its assignment at just one of the half-dozen hospitals it was engaged to build.

The Perm job was a conspicuous flop. It took UK Modul more than a year to deliver all the modules, said Vladimir Sodomov, former deputy director of economics and procurement at Perm’s Heart Institute, who helped oversee the building.


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GOOD HEALTH: Nikolai Shamalov was one of two wealthy Putin comrades to win contracts to build a series of hospitals. The undertaking saw a private firm the men co-owned go bust. Businessman Sergei Kolesnikov verified the person in this photograph, which appeared on a Russian website. Reuters is unable to independently verify the location, source or date of the photograph.


The prefabricated blocks were meant to be put together like Lego bricks, but didn’t fit because UK Modul had used the wrong plans, said one former executive at the company.

“The holes weren’t in the right place. The modules should fit together and onto the foundations perfectly, but they didn’t,” said the former executive, who declined to be named because he still works in the industry. “They (UK Modul) had no expertise.”

The problems were eventually resolved by another company, and the Perm hospital was completed in February 2012, almost a year after UK Modul had been replaced.

Shamalov did not respond to written requests for comment. Gorelov declined to be interviewed, but sent a written statement in which he said: “I was a passive shareholder in the indicated companies. The business ideology and direct management of their activities was carried out by other shareholders, members of the board of directors and the directors of the companies. In connection with this I don’t have information about the questions that interest you.”

Several former managers and employees at UK Modul said the Russian state was partly to blame for the Perm fiasco, because it did not pay bills on time.

In February 2011, Viktor Rusanov took over as head of DEZZ, the agency overseeing the hospital project. He told Reuters that UK Modul failed to deliver on agreed tasks and “wanted yet more money.”

As problems mounted with UK Modul’s work on the Perm hospital, DEZZ cut back UK Modul’s state contracts. Eventually, in March 2011, it cancelled them altogether.

Workers who turned up at the Cherepovets factory in March 2011 were greeted with a curt notice informing them it was closed. A subsequent letter from management told them that UK Modul had lost its government financing, leaving the company unable to pay wages and forcing it out of business.

“Six hundred people worked in the factory, and they were simply chucked on the street,” Gennady Smirnov, one of the workers, told Reuters.

Smirnov said he and many other workers were not sent vital labour documents enabling them to seek work elsewhere or claim unemployment benefits. He said he was left out of work for a year and had to borrow money from his mother-in-law to pay the mortgage on his apartment.

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OPENING CEREMONY: Sergei Sukhanov, head of Perm Medical Centre, at its opening in February 2012. The hospital was a flagship of a grand project to improve the country’s health care. REUTERS/Maxim Kimerling

LATE AND EXPENSIVE

Given the chaotic end to the efforts of Rosmodulstroi and UK Modul, it is hard to tell whether their shareholders made a profit on Putin’s hospitals. What is clear is that the state felt it received poor value for money - so much so that it sued UK Modul for damages.

The president’s associates managed to complete just one of their half-dozen hospital projects, according to former UK Modul insiders - the deal to provide half the modules for the Chelyabinsk hospital.

In the end, Russia imported more modules and built 13 of the planned 15 hospitals in Putin’s grand health project. It took around five years longer than envisaged. Cadolto, unlike UK Modul, met its contracts and there is no suggestion it was responsible for any delays.

The final cost to the Russian federal government for the project was about 70 percent more than first budgeted: $1.69 billion, according to official documents seen by Reuters.

UK Modul wasn’t the only problem. Two hospitals in which UK Modul wasn’t involved failed completely. The hospital at Krasnodar was knocked down because mould ruined the modules after they had been installed. Another at Vladivostok was cancelled after delays and cost overruns.

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It was left to Russian taxpayers to clear up the mess.

Technointorg, a state organisation that oversaw the early phases of the hospital building programme and the supply of medical equipment, ended up going bankrupt in September 2013. It left debts of more than $300 million.

Its successor, DEZZ, sued UK Modul over its $97 million contract to build the Perm hospital.

Judges upheld that claim and ordered UK Modul to pay $22 million. More than half of the amount was for "unjust enrichment" for failing to meet its obligations in terms of deadlines and standards, according to documents from the Moscow commercial court.

UK Modul never made good on that money. The company went bankrupt in May 2012. Its assets, worth $26 million on paper, fetched $40,000.

Russia’s Ministry of Health did not answer questions about the financing and construction of the hospitals. But in a written statement it said: “Realising the measures of the priority national project in the area of Healthcare actively encourages improvement of the demographic situation. The development of specialised, including high-technology, medical aid is one of the basic directions of the activity of the Ministry of Health and Social Development of the Russian Federation.”

Dashinevsky, the professor at the Higher School of Economics, said Russia’s health system has suffered chronic underfunding for the last 10 to 15 years and become increasingly riddled with corruption and inefficiency. The botched hospital programme, he said, helps explain why.

“Healthcare is just one typical sector of the Russian economy. There is no special disease of healthcare,” he said. “It’s a general disease of the state.”

From Comrade Capitalism


Thank you for the tag, @SvenSvensonov . Well I'm not going to go on an anti-Putin spiel as I believe I've already voiced my opinion on Mr. Putin in several threads already and have not failed to mention my personal opposition to his unilateralism in The Crimea. I'm going to throw a curveball by talking about how small to medium sized enterprises have been affected since the imposition of these sanctions.

The new sanctions on Russia's financial , energy, and defense sectors in July and September will have growing costs for key companies and the overall economy over time. As a result, Moscow's retaliatory ban on certain western agricultural imports have definitely displaced many Russian SMEs that were involved in the imports of goods from the west, so bad that many organizations have shut down due to the complete halt in trade in certain goods and services.
 
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In a certain sense, this crisis presents a great opportunity for Russia to restructure and diversify its economy.
You are right-and people in Russia know and realise this.But and it is a big BUT till this day there are politicians and bankers,people in power etc who doing their best to stop any initiatives to modernize Russian economy.They prefer old kind of relations.But thanks to sanctions(a nice opportunity to use) there are ever increasing pressure from media,public organizations,various politicians,economical experts againts them.Just days ago there was a quite of debate in Russian Duma -the same people in Russian CB,MoF,Ministry of Economy etc were under fire for their policies.There are already talks for new goverment even(just few ministers from the old goverments will stay,rest will be out).Lots of information at russian language sites -and when read about the activity of people in power who are for old status-quo first thing coming to mind is treason.In order for Russia to move ahead and achieve something such people need to be removed from power .
And why you USA people are so obssesed with Russian corruption?It is all about the corruption in Russia or China always and every time.And corruption in Washington DC is not existent?Bribing is not legally allowed in USA?No corruption at Wall Street,no corruption in MIC?No revolving door between USA goverments and corporations?No insider trading between FedReserve and banks?Market manupulation done by biggest banks is nothing and not worth mentioning and invistigation.Cosy relations between Goldman and FedReserve is nothing and not worth mentioning and invistigation?
Corruption is wide spread all over the world unfortunately and no goverment doing anything of importance to curb it.It is simple reality.To talk about someone else corruption while conviniently ignoring rampant corruption in our own native country is hight of hypocrisy.
 
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@LeveragedBuyout , what a great post! May I ask you a question regarding the opportunities for the Russian State as a result of these sanctions ? Given, let's say that there will be replacement of officials , restructuring of policies and procedures (let's say that the Anti-Corruption drive goes in full swing), do you think that there will be a possibility of restoration of relations with Russia ? What kinds of terms must be met before the West 'resets' its relationship with the Kremlin?

Advanced Thanks.
 
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You are right-and people in Russia know and realise this.But and it is a big BUT till this day there are politicians and bankers,people in power etc who doing their best to stop any initiatives to modernize Russian economy.They prefer old kind of relations.But thanks to sanctions(a nice opportunity to use) there are ever increasing pressure from media,public organizations,various politicians,economical experts againts them.Just days ago there was a quite of debate in Russian Duma -the same people in Russian CB,MoF,Ministry of Economy etc were under fire for their policies.There are already talks for new goverment even(just few ministers from the old goverments will stay,rest will be out).Lots of information at russian language sites -and when read about the activity of people in power who are for old status-quo first thing coming to mind is treason.In order for Russia to move ahead and achieve something such people need to be removed from power .
And why you USA people are so obssesed with Russian corruption?It is all about the corruption in Russia or China always and every time.And corruption in Washington DC is not existent?Bribing is not legally allowed in USA?No corruption at Wall Street,no corruption in MIC?No revolving door between USA goverments and corporations?No insider trading between FedReserve and banks?Market manupulation done by biggest banks is nothing and not worth mentioning and invistigation.Cosy relations between Goldman and FedReserve is nothing and not worth mentioning and invistigation?
Corruption is wide spread all over the world unfortunately and no goverment doing anything of importance to curb it.It is simple reality.To talk about someone else corruption while conviniently ignoring rampant corruption in our own native country is hight of hypocrisy.

I don't deny that the US has its own problems with corruption, but we do have an independent judiciary that has a fairly good record of prosecuting criminals. The reason for the American fascination with corruption in Russia and China is the sheer scale--I can't think of an American billionaire who gained his wealth through pure corruption in the same way that some Russian and Chinese billionaires have. Our IRS is probably more feared than the NSA as far as its ability to track money and tax it (and if you have money without having paid tax, watch out!)

That's also why Russia and China can talk vaguely about American corruption, but rarely write exhaustive articles like the ones above. Our corruption simply isn't sensationalist enough, and when it is, it's usually part of some larger crime (e.g. the mafia). But as I invite all of our anti-American friends on PDF, please post articles about our corruption. I believe in transparency, so whatever you can expose and educate me about, I will welcome.
 
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@LeveragedBuyout , what a great post! May I ask you a question regarding the opportunities for the Russian State as a result of these sanctions ? Given, let's say that there will be replacement of officials , restructuring of policies and procedures (let's say that the Anti-Corruption drive goes in full swing), do you think that there will be a possibility of restoration of relations with Russia ? What kinds of terms must be met before the West 'resets' its relationship with the Kremlin?

Advanced Thanks.

The dirty secret of the US is that it is a business-oriented country. Calvin Coolidge famously said, "the chief business of the American people is business. They are profoundly concerned with buying, selling, investing and prospering in the world." That is why, despite our ideological opposition to communism, we had trade relations with the USSR. That is why we have such critical trade relations with China, despite [what we consider to be] its shortcomings. It's why we do business with the toxic Saudi Arabia. It's also why, despite the evil it has perpetrated and represents, there is such a push to normalize relations with Iran.

Russia is no exception, and I can imagine a future where we reach some accommodation and normalize relations. This will be accelerated if we see a real change in Russia (e.g. anti-corruption, a better attempt at appearing to be democratic [to put it cynically], better relations with its immediate neighbors, etc.) Of course, if Russia and Ukraine can settle their issues, it's hard to believe that the US would stand in the way--we can't want something more than the principals involved want it. It may come to pass that after a decade, Ukraine just gives up its claim to Crimea, the same way that Georgia gave up on Abkhazia. But we, the US, need to know that Russia won't interpret this as appeasement, and then make a grab at, say, Belarus or Kazakhstan.

Please keep in mind that the US never had "normal" relations with Russia, so I am referring to a status-quo ante-bellum sort of relationship, not a warm one.
 
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@SvenSvensonov Excellent series, thank you. What a pleasure it is to read long-form investigative journalism, which is all too rare these days. Some thoughts, though not necessarily related to each other except through the overall theme of corruption in Russia today:

-When Russia interferes with countries through bribery and troops, it's protecting the rights of the people. When the West does it, it's imperialism.

-David Goldman, who writes under the nom de plume of "Spengler" at the Asia Times presciently predicted in 2008 (and then again in 2013) that Russia would try to solve its demographic problem by taking the the Russian-populated territories of Ukraine, Belarus, and Kazakhstan to increase the Russian population under Russia's control. Georgia was the template. All the political wrangling over the legitimacy of the Ukrainian government has been cover for this project, and we can expect to see more moves along these lines in the future.

-A friend of mine who works in Moscow once speculated that the reason why Putin maneuvers so much to stay in power is that as soon as he loses power, he is essentially a dead man, for his successor will do to him what he has done to his enemies (Khodorkovsky, Litvinenko, etc.)

-Yet another argument for why strong, efficient institutions are far more important to a successful society than the veneer of democracy. The article hints at why corruption is able to flourish in Russia today: "Several former managers and employees at UK Modul said the Russian state was partly to blame for the Perm fiasco, because it did not pay bills on time." Doesn't pay bills on time, doesn't make decisions in a timely manner... it's easy to see how an otherwise honest businessman might "provide an incentive" to a Russian bureaucrat to ensure that the state does its job correctly and quickly, which would be otherwise unnecessary in a country with more professional standards

-Russia certainly has done better under Putin than Yeltsin, but the main difference I see is that the corruption is less chaotic and more focused, but probably still of the same magnitude. As one of the article states, the way to make money has shifted from grabbing state assets to doing business with the state, which doesn't seem to be a material improvement in my eyes.

In any case, how sad and unfortunate for the Russian people. Russia could have easily gone the way of Poland, which also enacted "shock therapy" reforms after the end of communism, and is now one of the most successful countries in Europe. Instead, Russians must steel themselves with cynicism to deal with the continued failures of the state. Dealing with the opaque leadership in China and letting the corrupt rentier system continue is far easier than the economic reform necessary for better relations with Europe; it's clear that true friendship between Russia and the West was never in the cards, so the idea that we "lost Russia" is misplaced.

Finally, how can Russia expect to break the reign of the USD as the global reserve currency when their state is in such a shambles?



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