The Putin Mystique: Inside Russia’s Power Cult

by Anna Arutunyan

  On January 27, Deputy Prime Minister Dmitry Medvedev, by then evidently one of two heirs apparent to Putin, made his debut at the World Economic Forum in Davos, where Browder was a perennial presence. As the future president sat quietly eating his dessert, Browder approached him to broach the subject of his visa – and ask Medvedev if he could put in a word for him.

  Just at that moment, though, other journalists approached the two, and it became clear that whatever Medvedev said would be a public statement.

  “Since this was his international debut it wouldn’t have done it any good to say no, so he said, yes, please give me your application and I will submit it with a recommendation that your visa be approved,” Browder said of the meeting.

  The exchange apparently had an effect – though not exactly what Browder had been expecting.

  A few weeks after the request, Browder’s deputy in Moscow got a phone call from Artyom Kuznetsov, a lieutenant colonel with the Interior Ministry, saying he’d like to meet for a “face to face chat.” It was unclear how – or whether – the exchange with Medvedev led to Kuznetsov contacting Hermitage Capital, but apparently the police colonel had been given Browder’s visa application for consideration.

  “He would have to write a report and depending on what [we] provide in the meeting and how [we] behave will determine what [he will] write in [the] report,” Browder said.

  Hermitage Capital refused the offer of an informal meeting, demanding questions and answers in writing.

  What happened next was a bureaucratic retribution of Kafkaesque proportions, involving a whole army of prosecutors, investigators, tax officials and judges.

  In June 2007, Kuznetsov led a raid of twenty-five masked police officers on Hermitage Capital, extracting hundreds of accounting documents. A similar raid followed on the legal firm Firestone Duncan, which advised Browder, and where Sergei Magnitsky worked. The documents and seals of three Hermitage Capital shell companies obtained in the raid ended up being used in a scheme to get an unprecedented tax refund of $230 million – processed and paid out within the course of a day at a central Moscow tax inspectorate. It was believed that after pocketing a share of the refund, Kuznetsov and his colleagues then used the embezzlement to put together a criminal case against Hermitage Capital.

  When Browder objected, Kuznetsov swooped down on Firestone’s tireless lawyer, Sergei Magnitsky, who had exposed the fraud, and arrested him in November 2008 on charges of tax evasion. After eleven months of refusing to cave in to pressure to recant his testimony against Kuznetsov and testify against Hermitage, Magnitsky died.

  If we separate the Russian spheres of zakon (the law as it is on paper) and the murkier ponyatiya (or understandings – the so-called unspoken rules which actually govern the country), it is easy to see how someone like Browder could have violated both. With regards to the law on paper, we have already seen how practically every businessman in Russia is guilty in some way. The journalist David Hoffman recounts how small businessmen would complain that according to official calculations, their total tax bill would amount to unrealistic sums – as much as 110 percent of their profits. “The laws made almost every businessman and taxpayer a lawbreaker – and thus a potential criminal and thus a willing supplicant to power and, finally, a briber,” he wrote.140

  As a minority shareholder, Browder appeared to have used these same laws against powerful company owners and profited from them – forgetting that in the process, he was also violating them himself, as all businessmen in Russia were.

  The tax evasion charges levelled against Hermitage Capital stand out in particular. Russian authorities, who issued an international arrest warrant for Browder in 2013, alleged that as it bought up shares of Gazprom at the turn of the millennium, Hermitage avoided the limitation that barred foreign companies from owning shares in state-controlled energy companies like Gazprom. It did this by allegedly registering several Russian companies in the internal Republic of Kalmykia, and buying the shares in their names. To avoid the 35 percent corporate tax, these firms, according to several employee testimonials, hired disabled employees and paid the reduced tax rate of 5 percent.141

  Browder has not denied certain financial and tax arrangements, but he insisted they were entirely legal. “If one took these accusations seriously, then every foreign investor in Russia should be under arrest,” Browder told the Financial Times in spring 2013.142

  Depending on the quality and expertise of one’s lawyers, this scheme could either be legal or illegal. But by the time Browder fell out of favour and refused to strike a deal with Police Lieutenant Colonel Artyom Kuznetsov, the accusations were dug out and used against him and Sergei Magnitsky in particular.

  But something had to happen for Browder, a loyal investor and a cheerleader for Putin, to fall out of favour so suddenly. If he had crossed the paths of companies like Gazprom and got away with it for years, whose path did he cross then, and why did his fortunes change?

  It was only by the summer of 2006 – after some eight months of unsuccessfully trying to get his visa reinstated – that Browder began to understand what had happened.

  “What really drove the point home was Putin being asked [about me] at the press conference at the G8,” Browder said.

  When a journalist asked Putin specifically about Browder at the G8 Summit he was hosting in St. Petersburg in July 2006, Putin characteristically avoided mentioning him by name – as he would with Khodorkovsky and many others who had lost his favour.

  “I will say honestly that I simply do not know the reason why a specific person was denied entry into the Russian Federation,” Putin said. “I can imagine that this person broke the laws of our country, and if others break the laws, then we will deny [entry] to them.”143

  For Browder, the refusal to mention him by name seemed to sting, particularly as he had evidence that Putin had discussed his case at an earlier Security Council meeting. Those discussions seem to hold the key to what finally tipped the favour against Browder.

  While it is impossible to verify this kind of information, Browder says that according to two different sources who attended the National Security Council meetings, certain people were arguing against letting Browder back into the country, and their arguments, apparently, prevailed with Putin.

  “At that point I realized there was something deeply wrong in terms of my own situation with Putin,” Browder said. “He clearly wasn’t my friend.”144

  3.

  Who were those “certain people,” and why was it only then that they succeeded in lobbying Putin even though Browder had been making mischief for Russian oligarchs for a good part of ten years?

  Finding irrefutable answers to those questions is impossible for the same reason that investigative journalism is all but absent in Russia – no one will ever go on the record with an account of what happened in backroom talks at such a high level.

  But we can easily discern a pattern whereby favour at the very top and protection from above not only determines a businessman’s fortune, but the extent of his chances of winding up in jail. Browder may have misread those patterns, or overestimated his own privilege with regards to Russian elites.

  Browder said he believes that one of the companies he invested in, like Gazprom, Surgutneftegaz, and Transneft – though he does not know which one – was behind the move to kick him out of Russia. Indeed, Russian authorities have since accused Browder of buying Gazprom stock to “try to get access to financial and other documents that have strategic significance for Russia.”145

  “I can’t tell for sure which of the companies gave the order to bar me from Russia,” Browder told me. “I’m certain it was coming from one of the companies whose corruption we were exposing.” If that was the case then it isn’t clear why these companies – which have a hefty state presence or Browder wouldn’t have invested in them – hadn’t pounced sooner, as when Browder helped get the CEO of Gazprom fired in 2001.

  The answer may have something to do with the
cumulative effect of Browder’s activities in Russia’s hydrocarbons sector.

  In 2003, the arrest of Yukos chief Mikhail Khodorkovsky, Russia’s richest oil magnate, sent shockwaves through the business world. The jailing, as we shall see in Chapter 13, was the result of a Russian oligarch breaking the unwritten rules that governed the delicate balance of power between the realm of the businessmen and the realm of the sovereign.

  At the time, Browder had believed that the arrest was an attempt by Putin to clean up corporate governance, and even praised the persecution.

  “In retrospect, my appreciation of [Putin] was wrong, but at the time I thought he was cleaning up Russia,” Browder said. He saw Khodorkovsky’s arrest as the final coup in reining in the Yeltsin-era oligarchs. The way he understood the aftermath, oligarchs came to Putin “one by one and asked him what they needed to do not to get arrested.”

  But Browder’s approval of Khodorkovsky’s arrest may also have been influenced by Hermitage’s financial losses connected with Yukos.

  Browder would later recall that Hermitage had a share of Yukos stock in 1999, but that Yukos management deliberately caused those shares to plummet – losing over 99 percent in value. And even though Yukos cleaned up its act, Browder admitted that he was still angry at the company in 2005 for all the pain that it had caused Hermitage.146

  In 2005, the Rosneft state oil company had capitalized on the partition of Khodorkovsky’s Yukos empire. After the forced bankruptcy of Yukos, its chief production asset, Yuganskneftegaz, was auctioned off to a single bidder, the previously unknown Baikalfinansgrup, for $9.7 billion. Just days later, on December 22, Baikalfinansgrup was purchased by Rosneft. The chairman of Rosneft’s board of directors is Igor Sechin, Putin’s right-hand man, who for years has been regarded as the second most powerful man in the country. It is to him that critics credit the dismantling of the Yukos empire.

  According to one version of events cited by one of Russia’s most respected business dailies, in October 2005, just a month before Browder was expelled, Hermitage had interfered with the consolidation of Rosneft’s subsidiaries just as it was gearing up for an initial public offering in April of 2006. According to this version, the interference was reportedly serious enough that it prompted Sechin to lobby personally for Browder’s expulsion.147

  Browder has denied any involvement in Rosneft and its subsidies; more convolutedly, so has Sechin himself.

  According to Yelena Panfilova, the head of the Russian branch of Transparency International who has extensively investigated not only Magnitsky’s case, but Browder’s work in Russia as well, indirect involvement in Yukos assets probably contributed to Browder’s eventual expulsion – but could not have been the only factor.

  “The strengthening of his position in regards to these assets could have caused some degree of nervousness among the players, who saw this as their spoils alone,” she told me when I asked about the Yukos connection. “I can’t say that he took part directly, but that when these assets were sold, certainly some shares wound up in their portfolios.”

  “He got a false sense of being privy to these elites, and it was false because these elites had their own criteria about who was privy and who was not,” Panfilova explained. “And this let him down him, as it let down a lot of people in history. When you think you’re an insider, but it turns out that they’ve only let you near them, but haven’t made you one of them.”

  When Browder started flaunting his “alignment of interests” with Putin in 2005, he crossed the line by presuming a degree of closeness and loyalty that no foreign investor could ever have. When Browder crossed the line, he lost his krysha, his “roof,” and his presumably “favoured” status. The “inner circle” of ministers that Browder had so prided himself on knowing, now cut him loose. The state, personified by Putin and by the ministers, turned away from him and left him at the mercy of the paper law. They didn’t trigger the string of embezzlement, fraud and extortion charges – that came from specific law enforcement officials – but by distancing themselves from Browder they made it clear to law enforcement predators that he was fair game.

  The phone call from Lieutenant Colonel Artyom Kuznetsov, ostensibly about Browder’s visa, was an overture from a new, albeit, lower level type of krysha – Kuznetsov was offering Hermitage his protection services. But Hermitage refused.

  And given Russia’s paper law, it was only a matter of time before law enforcement officials who worked the protection racket dug up enough on his company to put someone in jail.

  4.

  Given that the key charge levelled at Putin’s regime by his opponents is corruption, understanding the peculiar advantages this system poses for millions of people helps elucidate the resilience and the de facto stability of Putin’s rule.

  As the Medvedev-backed investigation into Magnitsky’s death sputtered to an end and as those who had persecuted Browder and Magnitsky were cleared of wrongdoing by Russian authorities, new evidence started emerging about about how, exactly, they had benefitted. Many of these officials, including Lieutenant Colonel Artyom Kuznetsov and Major Pavel Karpov, both of whom Magnitsky had accused of taking parts in the tax rebate scheme, would go on to be named in the U.S. Magnitsky List of officials banned entry to America.

  Documents appeared showing that Kuznetsov, who lived on an official Interior Ministry salary of £7,200 a year, had purchased a £55,000 Mercedes convertible and a £90,000 Range Rover in the name of his wife. Travel receipts showed him splurging thousands of dollars at a five-star resort in Cyprus. Many of these receipts were dated before the June 2007 raids on Hermitage offices that enabled the fraudulent tax refunds to take place.

  Karpov, meanwhile, is documented as owning a £50,000 Mercedes Benz and a £28,000 Porsche registered in his wife’s name – all despite an official salary of just £4,000 a year. Far from casting a shadow on his prospects, over a year after Magnitsky’s death Karpov was promoted.148

  Not only law enforcement officials were getting rich. Olga Stepanova, the head of the Moscow Tax Office who authorized a whole string of fraudulent tax refunds between 2006 and 2008 (including the $230 million transaction with Kuznetsov), allegedly acquired over $38 million of assets – including a villa and two apartments in Dubai, a $12 million estate in the Moscow region, and a seaside villa in Montenegro – with many of the assets registered in the name of her pensioner mother-in-law.149 In autumn 2012, following the sacking and investigation against her former patron, Defence Minister Anatoly Serdyukov, Russian authorities would launch a probe of Stepanova on allegations that she stole 8 billion rubles through tax fraud.150

  The Magnitsky affair and the officials who got rich from Hermitage’s refusal to accept Kuznetsov’s protection services is no isolated case – because a death was involved, it publicized a mechanism that is replicated in thousands of cases. In fact, in 2006 another major investment fund – Renaissance Capital – fell victim to a nearly identical tax refund scam involving $107 million. But even RenCap, which had links to government agencies, understood that little good would come of publicizing the fraud and chose to ignore it.151

  As for extortion and protection rackets in law enforcement, we have seen earlier just how pervasive the practice is. For every high-profile scandal involving the death of a sick person in pretrial detention, there are dozens of routine stories of police and prosecutors protecting illegal gambling establishments – and then celebrating such business partnerships with expensive vacations.152

  The critical mass of people from a variety of government and even non- government posts involved in what has been given the blanket term of “corruption” may hold the key to why it is impossible to overcome – because we are in fact dealing with a problem of terminology and social values. Take, for instance, a widely accepted definition of corruption, proposed by Samuel Huntington, as “behaviour of public officials which deviates from accepted norms to serve private ends.”153 But when a fifth of the economy consists of bribes, kickbacks, and o
ther forms of off the books enrichment – totalling some $300 billion154 – it is hard to see this as a “deviation.” When nine out of ten economic crime cases are fabrications,155 the “law” is merely an instrument for the enrichment of those entitled to apply it. And however bad it is, it is in fact an indelible part of the norm by virtue of its sheer pervasiveness. In other words, “corruption” is the norm for a sizable – 20 percent – minority of businessmen and state officials.

  And so the process that Magnitsky ultimately became a victim of was actually a way of life for millions of people – an entire social stratum that includes civil servants, tax officials, investigators, police and security officers and even businessmen. And for every Hermitage that refused Kuznetsov’s protection services, ten firms probably acquiesced. After being allowed to function this way on such small salaries for so long, a decisive denial of this kind of lifestyle could have seriously undermined the very functions of the law enforcement system. In other words, if President Dmitry Medvedev’s anti-corruption campaign had actually stopped corruption, millions of police officers would suddenly be forced to live on less than £350 a month. And that on its own would have presented an acute national security problem, threatening the very foundations of Putin’s hold on power.

  Mark Galeotti is one of the few scholars to have recognized some of the advantageous aspects of corruption and tax farming in Russia – not just as a way of governing, but even for some parts of the population. Describing tax farming as officials being “granted areas of responsibility and revenue targets and cut loose to raise all they could without igniting rebellion,” Galeotti enumerated several benefits to the state and the populace, such as low start-up costs, political loyalty from a vast swathe of enriched officials whose loyalty mattered, and simply “getting the job done.”156

  It is getting the job done – making things happen – in particular that may help explain Putin’s popularity among a large number of foreign investors like William Browder. Though they recognize the need for more transparency, they also see Putin as someone strong enough to balance the best of both worlds.