Strongman
Page 30
Like Gorbachev, Medvedev’s first visible measures were top–down initiatives designed to bring about what the market achieved, with very little help from governments, in the West. In March 2010 he chose the town of Skolkovo, in Moscow region, as the site for what he hoped would become Russia’s ‘Silicon Valley’. But was it not a contradiction in terms for a government to be establishing by decree an ‘innovation centre’? Not if the Kremlin ideologue Vladislav Surkov was to be believed. He advocated what he called ‘authoritarian modernisation’ (sic) and said political liberalisation was not needed for economic reform. According to Surkov ‘spontaneous modernisation’ only worked in Anglo-Saxon countries, whereas France, Japan and South Korea (and by implication, Russia) relied on ‘dirigiste methods’.
The following month Medvedev announced another ‘reform from above’: Moscow was to be turned into a leading global financial centre. But how? It smacked of Medvedev’s earlier attempt to ‘establish’ the rouble as an international reserve currency (this was announced in the same ill-conceived speech at Evian in which he called for a new security treaty in the wake of the Georgia war). There seemed little understanding of the psychology of markets, with their unfathomable mixture of gambling, guesswork, experience and foresight. Alexander Voloshin, former chief of staff to both Yeltsin and Putin, was put in charge of the project. He is a renowned wheeler-dealer, but this seemed a task too great even for him. A year later Medvedev announced that the project was ‘half-complete’. So apparently if such progress keeps up, Moscow will be an international financial capital by mid-2012.
Medvedev became obsessed with Russia’s inability to become integrated into the world economy. In 2009 foreign capital investment fell by 41 per cent. In February 2010 the president put deputy prime minister Igor Shuvalov personally in charge of improving Russia’s investment image, with a ‘special structure in the ministry to analyse obstacles that hinder it’. Shuvalov is a clean-cut, crew-cut, smart young politician much admired by Western businessmen. He personally contributes to Russia’s international links by renting a 400-square-metre apartment in London and a 1,500-square-metre villa in Austria. Shuvalov has led Russia’s efforts (crucial for integration into the world economy) to join the World Trade Organisation – an on-off process hampered both by American obstacles and by Putin’s apparently lukewarm approach. In June 2009, for example, two days after the US and EU trade representatives successfully completed a round of talks with Shuvalov that would lead to WTO membership ‘by the end of the year’, Putin announced out of the blue that Russia would only join together with Belarus and Kazakhstan, as a ‘single customs union’, even though both countries were miles behind Russia in their negotiations with the WTO. The announcement appeared to take Medvedev and Shuvalov by surprise and put off Russian membership indefinitely.
When he returned from his eye-opening trip to California in July 2010, President Medvedev called in Russia’s foreign ambassadors for a private talk in which he hauled them over the coals for their antediluvian approach to their work. (It reminded me of the foreign ministry official who told us, when asked to explain why it took so long to organise interviews with deputy ministers, that ‘we still work in the nineteenth century here’.) Medvedev sternly told his diplomats to stop sending him pointless dispatches about world events. ‘I can read about them perfectly well on the internet,’ he said, ‘and a lot sooner than you tell me about them.’ In future, the foreign service was to devote itself to Medvedev’s Big Idea – modernisation – by advancing Russia’s cause and attracting investment, especially from key countries, which he named as Germany, France, Italy, the EU in general and the USA. A Kremlin official who was present summed up the president’s lecture as ‘either change your views and your brains, or get out of the diplomatic profession’.5
But a question remained unanswered – one that has bothered me over many years since the fall of communism in Russia. Why is it that Russia did not – could not – turn itself into a thriving manufacturing country like China or many other developing economies? It has the brains and skills, an educated but relatively cheap workforce, limitless natural resources, all the space you could want for the construction of new facilities, a market desperate for Western goods ... and yet when do you ever look at the label on an article of clothing and read ‘Made in Russia’, or buy a computer or camera or piece of furniture imported from Russia?
There are many explanations. But by far the biggest obstacle to foreign investment (or the creation of an international financial centre in Russia) can be summed up in one word – corruption – a word so complex that one leading Russian businessman told me I would never, as a Westerner, ever, understand it. ‘Theft,’ he said, ‘is not theft as you know it. It is the entire system – the political system, the business establishment, the police, the judiciary, the government, from top to bottom, all intertwined and inseparable.’
Crooks and thieves
In Chapter 3 I described how IKEA became one of the first stores to open up outlets in Putin’s Russia. There are now 12 stores around the country, where millions of Russians love to spend their weekends buying affordable and fashionable furniture. IKEA has done more than any other institution to enhance the look and comfort of Soviet-built apartments. Yet the Russian machine – local mayors, bureaucrats, judges, police – did everything in their power to stop it from happening. Not because they objected to the Swedish business moving in, but because, being part of the Russian machine, they could not even imagine letting that happen without reaping fabulous profits for themselves – and IKEA righteously refused to pay the bribes that would have smoothed the way. The company even sacked two senior executives who were discovered, not even to have paid bribes themselves, but to have turned a blind eye to a corrupt transaction between one of IKEA’s subcontractors and a power-supply company. But its ethical stance caused unimaginable problems that might easily have prevented one of the world’s most ubiquitous and successful stores from penetrating the Russian market.
The tactic most often used by crooked authorities (and they are almost all crooked) to extort money from businesses is to invent a problem (lack of some permit, for example), then demand cash for that ‘problem’ to be ignored. Unless the bribe is paid, the problem remains, and permission for development is withdrawn – or worse, the police are called in and the entrepreneur ends up in prison for ‘violating’ some regulation or other. The size of the bribe depends on the size of the company – so Russian authorities naturally saw IKEA as a big, friendly, blue-and-yellow cash cow.
IKEA’s Russia manager, Lennart Dahlgren, came to Moscow in 1998 and stayed for eight years, battling with the authorities to open the first IKEA stores and ‘Mega malls’. He has since written his memoirs, Despite Absurdity: How I Conquered Russia While It Conquered Me,6 detailing with remarkable good humour his near impossible mission to do business in Russia without paying bribes. When the company built its first distribution centre in Solnechnogorsk, outside Moscow, at a cost of $40 million, the police suddenly turned up and closed the entire site down because they didn’t have all the correct permits. ‘To build a big shopping centre like IKEA or Mega it is necessary to get more than 300 separate permits,’ he says. The district mayor demanded 10 million, then 30 million roubles (more than $1 million) to relaunch construction. Dahlgren agreed to pay the money – not to the mayor but to a charity fund, openly and publicly. It worked.
A year later IKEA tried to open a huge store in the Moscow suburb of Khimki, but was obstructed because the shopping centre operated on reserve generators and a traffic interchange had not been built. To overcome this problem IKEA had to build two bridges for $4 million and pledge $1 million for the development of children’s sports. IKEA’s founder, Ingvar Kamprad, says Russian power companies cheated the company out of $190 million by overcharging it for electricity and gas. He said it only happened because they refused to pay bribes.
The World Bank publishes an annual survey in which it ranks 183 countries of the
world according to ‘ease of doing business’. In 2011 Russia came in at 123 – far behind other post-Soviet states such as Georgia (at 19) and Kyrgyzstan (at 44). In terms of ‘dealing with construction permits’ Russia sits in 182nd place, ahead only of Eritrea.7
Dahlgren wanted to arrange a meeting for IKEA’s owner – one of the wealthiest people in the world, and a man with great enthusiasm for doing business in Russia – with Putin. At first they palmed him off with meetings with a deputy prime minister. Then Dahlgren had an opportunity to discuss the proposal with someone from Putin’s entourage, who told him they didn’t think IKEA would really want to have a meeting with Putin. Dahlgren writes: ‘I don’t know whether they meant it seriously or as a joke, but they said: “IKEA is penny-pinching, and the going rate for a meeting with Putin is 5 to 10 million dollars, which you will never pay.” ’
The New Times magazine has cited government sources as saying that an appointment with deputy prime minister Igor Shuvalov, by contrast, costs a mere $150,000. A member of the public wrote to President Medvedev on Twitter that he requested a meeting with first deputy chief of staff, Vladislav Surkov, in February 2011 and was asked for $300,000. Medvedev even replied to him: ‘I showed your tweet to Surkov. Call his office. Tell him who is trying to extort money.’
Needless to say, all such suggestions that top officials grant audiences only in exchange for bribes are officially denied. But there is absolutely no attempt to hide the scale of the problem generally in Russia – nor that it is escalating at a phenomenal rate under the current Russian leadership. At a Kremlin meeting devoted to corruption on 29 October 2010 Medvedev himself stated that Russia loses up to $33 billion a year due to corruption. Officials in charge of state purchases rake in so much in kickbacks from suppliers that it officially accounts for one-tenth of all state expenditure. According to the chief military prosecutor, 20 per cent of the military procurement budget is stolen by corrupt officials.8 Overall, according to Medvedev, ‘the level of theft could be reduced by a trillion roubles, by the most conservative estimates. That is, we already understand that in [the sphere of state procurements] gigantic sums are being taken by bureaucrats, and by unscrupulous businessmen working in this area.’9 An independent report puts the level of corruption even higher – at $300 billion a year, equal to one quarter of GDP.10
The financial crisis made no difference in the world of Russian corruption: between 2008 and 2009 the average size of a bribe in Russia nearly tripled – according to an official interior ministry report – to more than 23,000 roubles ($776). By July 2010, according to the same official body, the average bribe had reached 44,000 roubles ($1,500), and by July 2011 the incredible sum of 300,000 roubles, or $10,000. The chief of the interior ministry’s Main Economic Security Department, Denis Sugrobov, told reporters: ‘Officials in charge of purchase and the placement of orders for state and municipal needs are particularly infected by bribe-taking.’ The head of Transparency International’s Moscow office added that $10,000 was the average business bribe, not connected with ‘mega projects’: ‘It is a bribe that medium-level businesses give to officials.’
The strange thing is that while these investigators know the size of the average bribe they do not apparently know who the bribes are paid to – or at least rarely take action. In terms of how much of a deterrent this rampant corruption is to foreign investors, it is enough to consider Transparency International’s corruption index, which ranks the countries of the world according to the level of perceived corruption among public officials and politicians: since 1996 Russia has slumped from number 46 in the world, to 82 in 2000 when Putin came to power, to 154 in 2010. There are, in other words, only a dozen countries in the world considered more corrupt than Russia.
There have been a few small successes in combating corruption. At a Kremlin meeting on 10 August 2010, the head of the Presidential Control Directorate, Konstantin Chuichenko, reported to President Medvedev on an audit of medical equipment purchased by state hospitals. He had discovered that, among other things, 7.5 billion roubles ($250 million) had been spent on 170 CT scanners – many of them costing ‘two or three times’ more than the manufacturer’s prices. Chuichenko opined that public funds were being used ‘inefficiently’. But Medvedev’s reply was more blunt: ‘You know, I think this is not just corruption but an absolutely cynical and brazen theft of public funds. The people who perpetrate this fraud have absolutely no shame and no conscience.’11 This led to a number of prosecutions of officials responsible for medical procurement, not just at lower levels but even in the presidential administration itself. Two of them, Vadim Mozhayev and Andrei Voronin, operated an extortion racket: they informed manufacturers of medical equipment (for example, Toshiba) that they had been placed on a fictitious blacklist, barring them from participating in public procurement tenders for their products, and offered to remove the companies from the blacklist if they paid $1 million. Toshiba reported the extortion attempt to the police, who investigated, and the officials were arrested. Voronin was sentenced to three years in prison.12 In another high-profile case, the head of the defence ministry’s medical administration, Alexander Belevitin, was arrested on 2 June 2011 for taking a $160,000 bribe from a foreign supplier of a CT scanner.13
Sometimes, though, it seems that US legislation – the Foreign Corrupt Practices Act – is more effective in uncovering bribery in Russia than anything the Russians do. In 2010 Diebold, the American ATM manufacturer, complied with the FCPA by dismissing five top managers of its Russian subsidiary after it discovered they had given kick-backs to officials to get business. The German car-maker Daimler was charged under the FCPA with giving bribes worth more than €3 million to secure contracts with Russian government customers for the purchase of vehicles. The cars were bought mainly by the interior ministry, the defence ministry and the ‘special purposes garage’ which serves the political elite. Daimler paid the money into offshore accounts. After a long delay, in November 2010, President Medvedev ordered an investigation into the case.14
Corruption goes hand in hand with the lack of an independent judiciary. Little has changed despite Medvedev’s calls for an end to what he termed ‘legal nihilism’. The most notorious case concerned the young lawyer Sergei Magnitsky, who died in prison in November 2009 after being arrested by the very officials he had accused of fraud. Magnitsky was a lawyer representing a UK-based firm, Hermitage Capital, the largest foreign portfolio investor in Russia. Its founder, Bill Browder, had done much to attract investors to Russia and was a self-professed supporter of Vladimir Putin. He had even applauded the arrest of Mikhail Khodorkovsky as an attempt to clean up Russian business. Part of his strategy was to promote good corporate governance and fight corruption in the Russian companies in which he invested, in order to increase their share price and increase profits. In November 2005, after he had tried to force a secretive oil company, Surgutneftegaz (which is rumoured to have links to Putin), to disclose its ownership structure, he was blacklisted as a ‘threat to national security’ and barred from Russia. Hermitage’s Moscow offices were raided in June the following year by – Hermitage claims – corrupt law-enforcement officers who used the tax documents and company seals they stole to perpetrate a spectacular theft from the Russian state budget. Magnitsky’s investigations revealed that organised criminals working with corrupt officials used the stolen documents to fraudulently reclaim $230 million of taxes paid by three Hermitage subsidiaries. When Magnitsky officially accused the policemen who had raided the Hermitage offices of fraud, those same policemen at once arrested him and threw him into Butyrka prison, where he was held without trial for 11 months in squalid conditions. He fell seriously ill, was denied treatment and died on 16 November 2009. There is no medical record for the last hour of his life, and relatives found that he had broken fingers and bruises on his body. According to a report by President Medvedev’s Council on Human Rights, in his final hours, when he was in need of immediate medical care, Magnitsky was handcuffed and t
aken to a small room by eight officers, where he was beaten and then left alone for over an hour until he died, while an ambulance team waiting outside was refused entry.15
The story is a Kafkaesque nightmare of an individual destroyed by a ruthless and impenetrable system, in which the people who should have been upholding the law were breaking it, and the alleged criminals were able to persecute the man who accused them. Hermitage has since carried out detailed investigations into the case and compiled an impressive dossier of evidence. They discovered colossal sums of money in foreign bank accounts belonging to one Vladlen Stepanov, the husband of Olga Stepanova, who, as head of Moscow Tax Inspectorate No. 28, had authorised the ‘tax refund’ to dummy companies. The Stepanovs’ fortune is estimated at $39 million (one thousand times greater than their declared joint income). They have luxury villas on the Persian Gulf and the Adriatic and one in the Moscow region worth $20 million. Not bad for a mere state tax official. Their alleged accomplices in the tax office and police also have fabulous fortunes. Hermitage has located assets worth $3 million, for example, acquired by the family of Lieutenant Colonel Artyom Kuznetsov (official salary $10,200) in the years after he arrested Magnitsky.16
In Russia, Hermitage’s accusations have gone unexplored. Following the report by his Council on Human Rights, President Medvedev called Magnitsky’s death a ‘crime’. Several senior prison officers were fired, and two prison doctors eventually charged with negligence. But the report also found fundamental flaws in the prosecution of Magnitsky (including the fact that he was investigated by precisely the people against whom he had testified), yet those who allegedly committed the enormous fraud and then framed Magnitsky have gone unpunished. Indeed some of the investigators were rewarded and promoted for their services. The tax inspector accused by Hermitage, Olga Stepanova, now works at Rosoboronpostavka, the procurement agency of the Ministry of Defence, whose minister, Anatoly Serdyukov, happens to be a former head of the federal tax office.