Timchenko, born in 1952 like Putin, comes from a military family. He graduated from an engineering institute in Leningrad and worked at a foreign trade organization in the city from 1982 to 1988. Many foreign trade officials belonged to the KGB, but no such evidence is at hand on Timchenko. In the late 1980s, some state enterprises were awarded rights to pursue foreign trade independently of Moscow foreign trade organizations, and Timchenko struck out on his own with two colleagues. They approached the state-owned Kirishi oil refinery in Leningrad and started trading oil for it. Timchenko met Putin in connection with his barter trade in 1991 or earlier.
In 1991, Timchenko started working with a Finnish company and developed oil-trading companies around the Kirishi refinery with three partners. In 1999, he became a Finnish citizen, seemingly living both in Helsinki and in St. Petersburg. In 2001, he moved to Geneva. He did reasonably well, but he was not prominent. The Kirishi refinery became a part of Surgutneftegaz in 1993, when a government decree assigned that company several oil assets. The general presumption has been that Timchenko and Putin received a corresponding share in the notoriously nontransparent Surgutneftegaz.23
In the early 2000s, Timchenko’s business suddenly took off. Together with the Swedish oil trader Torbjörn Törnqvist, he set up the oil-trading company Gunvor in 2000. Beginning in 2003, Gunvor started trading a large share of the oil and oil products exported from Russia, rapidly becoming the third largest oil trader in the world. Most of this oil came first from Surgutneftegaz and then from the two state-owned companies Rosneft and Gazprom Neft, as well as the privately held TNK-BP. The Economist claimed that Gunvor bought oil at a discount from the Russian oil companies. Timchenko sued the magazine for libel, but the case was settled out of court.24
After the public became aware of Timchenko’s existence in 2004, two suspicions were voiced in the media. One was that there was a third shareholder in Gunvor, namely Putin. Gunvor had a complex ownership, with several layers of shell companies, making it impossible to know the actual beneficiary owners. Much later, an unexpected third owner was revealed, a St. Petersburg butcher named Petr Kolbin, who turned out to be a childhood friend of Putin.25
In March 2014, the US Department of Treasury sanctioned Timchenko because of Russia’s annexation of Crimea: “Gennady Timchenko is one of the founders of Gunvor, one of the world’s largest independent commodity trading companies involved in the oil and energy markets. Timchenko’s activities in the energy sector have been directly linked to Putin. Putin has investments in Gunvor and may have access to Gunvor funds.” In July 2015, the US Treasury also sanctioned Kolbin.26
Gunvor itself was not sanctioned, and Timchenko fortuitously sold his shares in Gunvor to Törnqvist the day before he was designated by the US Treasury. Gunvor continues to trade oil, but it has divested from Russia. Designated by the US Treasury, Timchenko could no longer use Western banks or credit cards, so he was compelled to move from Geneva to Moscow, where he lives in one of the grand old Stalinist Politburo villas on the Sparrow Hills overlooking the capital.
Timchenko has two much bigger investments that have attracted less attention, Novatek and Stroitransgaz. Novatek surged as a highly successful and efficient independent gas producer in Russia under the well-connected entrepreneur Leonid Mikhelson. Unlike other independent producers in Russia, Novatek succeeded in getting production licenses and was allowed to use Gazprom’s pipelines, indicating considerable personal leverage. It has even been permitted to export liquefied natural gas.
Novatek took off after Timchenko bought 23.5 percent of its stocks in 2008–2009, and it has benefited through purchases of various gas assets from Gazprom. In August 2018, Novatek had a sizable market capitalization of $47 billion, which means a fortune of $11 billion for Timchenko for this holding alone. The US government has sanctioned Novatek, though mildly, but the EU has not, and Novatek has completed a vast liquefied natural gas plant in Yamal on the Arctic Sea for no less than $27 billion with plenty of Chinese and French financing. Currently, Mikhelson and Timchenko also co-own the large petrochemical company Sibur.27
In 2009, Timchenko made another big deal, buying 80 percent of the company Stroitransgaz, which is one of Russia’s two biggest builders of gas pipelines, and it remains one of the two biggest suppliers of gas pipelines to Gazprom, thanks to preferential public procurement, with billions of dollars in annual sales.28
Timchenko appears to have benefited greatly from his close personal relations with Putin. Gunvor took off from sales from Russian state-related oil companies; Novatek has thrived on unique access to gas field licenses and access to pipelines and now even to exports; Stroitransgaz lives on preferential state orders from Gazprom. These three businesses gained momentum in 2003–2009.
On March 20, 2014, the US Treasury announced: “Arkady Rotenberg and Boris Rotenberg have provided support to Putin’s pet projects by receiving and executing high price contracts for the Sochi Olympic Games and state-controlled Gazprom. They have made billions of dollars in contracts for Gazprom and the Sochi Winter Olympics awarded to them by Putin. Both brothers have amassed enormous amounts of wealth during the years of Putin’s rule in Russia. The Rotenberg brothers received approximately $7 billion in contracts for the Sochi Olympic Games and their personal wealth has increased by $2.5 billion in the last two years alone.”29
The brothers Arkady (born in 1951) and Boris Rotenberg (born in 1957) are among Putin’s oldest friends. Arkady and Putin did judo together from 1964, when they were twelve. Before 2004, the Rotenberg brothers were unknown to the public, and Russian biographical articles do not discuss their early business. Arkady gave his first interview in 2010 and said virtually nothing.30
The brothers Rotenberg were sportsmen and minor businessmen. Arkady did pedagogic studies in sports. Boris emigrated to Finland early on, but he has remained a junior partner to his brother. In the early 1990s, Arkady went into the business of protection, cofounding a St. Petersburg protection company called Shield in 1995. Rotenberg formed the Yavara-Neva Judo Club in 1998 with his brother and Timchenko, and Putin as president. In 2000, Rotenberg joined a company involved in real estate development, gambling, hotels, and restaurants, and in 2001 he set up a small bank with his brother, Boris, which appears to have functioned as their treasury.31
In 2008, Arkady Rotenberg struck gold when Gazprom magnanimously sold him five construction subsidiaries for $348 million, out of which Rotenberg formed his company Stroigazmontazh. Only then did his business become significant, focusing on construction of gas pipelines. Stroigazmontazh has been Gazprom’s biggest contractor, building gas pipelines. Just after Rotenberg formed the company, Stroigazmontazh won a major tender for the construction of the Nord Stream gas pipeline through the Baltic Sea from Russia to Germany. Without competitive tender, Stroigazmontazh won the contract to build the long pipeline Sakhalin-Khabarovsk-Vladivostok for nearly $7 billion.32
In 2010, the Russian media revealed that Arkady Rotenberg had acquired 9 percent of the big Moscow road construction company Mostotrest. Soon, he controlled the whole company, which was building the highway between St. Petersburg and Moscow and many other highways. Mostotrest employs some thirty thousand people.33
Rotenberg’s great boondoggle was the Sochi Olympics, for which his Stroigazmontazh and Mostotrest were the primary contractors. This was Putin’s personal project, and he had set up a special state corporation, Olimpstroi (Olympic Construction), for this purpose in 2007. Rotenberg’s companies received projects worth almost $10 billion. Nemtsov and Martynyuk deduce that these nonbid contracts were padded three to four times.34
Since 2011, Rotenberg has been the leader in the intricate art of attracting state orders, usually from Gazprom and the road construction agency. In 2015, he hit an all-time record, obtaining state orders of no less than $8.3 billion, of which Gazprom’s Power of Siberia pipeline comprised 36 percent. Timchenko usually ranks number three in the state order list. Arkady Rotenberg’s son, Igor, and brother, Bor
is, also rank high on these lists, which are still made public. By and large, big state orders are allocated without open competition at prices that are generally considered to be three times higher than competitive market prices.35
When the Blue Stream gas pipeline was built across the Black Sea from Russia to Turkey from 1998 to 2002, the cost per kilometer of pipeline was approximately $3 million; a competitive world market price would have been $1 million–$1.5 million. When Gazprom built Nord Stream through the Baltic Sea from St. Petersburg to Germany, the initial price estimate was $5 billion, but the final cost was $15 billion. As discussed in chapter 4, whenever Gazprom earns more profit than anticipated, capital expenditures are expanded in order to transfer the surplus to the privileged suppliers of major investment projects.36
Yuri Kovalchuk has been the chief executive of Bank Rossiya since 1991, but his real role is much bigger. He is the spider in Putin’s financial and media empire. He has acquired large financial and media assets from Gazprom, and he manages the financial flows of the whole Putin group as well as some twenty Russian television channels.
The US government designated Kovalchuk as a crony on March 20, 2014. The language was particularly harsh: “Yuri Kovalchuk is the largest single shareholder of Bank Rossiya and is also the personal banker for senior officials of the Russian Federation including Putin. Kovalchuk is a close advisor to President Putin and has been referred to as one of his ‘cashiers.’”37
Yuri Kovalchuk, born in 1951, was originally a physicist. At his research institute, he worked closely with Putin’s friends Andrei Fursenko and Vladimir Yakunin. In 1991, Kovalchuk decided to enter banking without any prior experience, which was common in those days. He became deputy chief executive of the regional Communist Party’s Bank Rossiya. Soon St. Petersburg City Hall, under Putin’s aegis, took over the bank and made it the financial center for the Putin group.38
The ownership of television channels has gradually been concentrated to Kovalchuk. In 2000, when President Putin forced Vladimir Gusinsky to sell his NTV, Gazprom bought it, but in 2004, a subsidiary of Bank Rossiya purchased Gazprom Media Group with five television channels—including NTV, TNT, REN TV, and Petersburg Channel 5—for $166 million. Two years later, First Deputy Prime Minister Dmitri Medvedev assessed Gazprom Media’s value at $7.5 billion. Gazprom Media assists the Kremlin in its propaganda. Kovalchuk has continued gobbling up Russian television channels, buying them at any price. For example, he has purchased the National Media Group with three television channels, whose chairwoman is Alina Kabaeva, widely believed to be Putin’s girlfriend.39
Bank Rossiya also bought Gazprom’s financial assets, notably Gazprombank and its insurance company Sogaz, in a series of complex transactions from 2004 to 2007. In 2004, Sogaz was sold on the Moscow stock exchange MICEX to a few select purchasers in a private deal without competition or transparency. Bank Rossiya claimed that it paid $120 million for Sogaz, which it considered a fair market price. But Sogaz developed rapidly, and Vedomosti journalists reported that businesspeople complained about “administrative” pressure to buy their insurances from Sogaz. Nemtsov and Milov assess Sogaz’s 2008 market value at $1.5–2 billion and conclude: “The sale of Sogaz became the first example of a transfer of assets from Gazprom to the personal friends of Putin.”40
In 2006–2007, Bank Rossiya used Sogaz to acquire Gazprom’s financial management company Lider, Gazprom’s pension fund Gazfond (with more than $6 billion in assets), and the majority of Gazprombank. All these deals were complex, discretionary, and nontransparent. To sum up, during the years 2004–2007, Gazprom transferred vast assets to Bank Rossiya, namely 51 percent of Sogaz, 75 percent of Lider, 50 percent plus one share of Gazprombank, 70 percent of the big chemical company Sibur, and 100 percent of Gazprom Media. Nemtsov and Milov estimate the 2008 market value of Gazprombank at $25 billion, and all its assets were spirited out of Gazprom for virtually nothing. Adding up the market value of the assets that Gazprom transferred to Putin’s cronies during the four years 2004–2007, Nemtsov and Milov arrive at the stunning sum of $60 billion. The Kremlin and the Gazprom management supported this asset stripping, for which nobody has been punished. These transactions have continued. They are complex and nontransparent, but their essence is that state companies buy private assets from cronies at very high prices, while the state companies sell vast assets for close to nothing.41
As chief executive of the Putin group’s bank, Yuri Kovalchuk is the spider in Putin’s financial web. His financial performance, however, appears miserable. When Bank Rossiya was sanctioned in 2014, it had just $10 billion in assets, suggesting that it regularly transferred its profits elsewhere.
The best insight into what is going on in the inner Putin commercial circle comes from a combination of three scandals involving Putin’s old friend Nikolai Shamalov: a palace being built in Gelendzhik near Sochi, a defecting junior partner, and a Siemens corruption case in the United States.
Shamalov is one of Putin’s contemporaries from St. Petersburg, an old friend and both a member of the Ozero dacha cooperative and a long-standing shareholder of Bank Rossiya. He is not in the same financial league as Timchenko, the Rotenbergs, and Kovalchuk, but his wealth is still significant. His primary business was to represent German Siemens in Russia in the sale of medical equipment. He did so quite successfully, but in 2008 Siemens sacked him after sixteen years of loyal service when the US Securities and Exchange Commission and the US Department of Justice fined Siemens $1.34 billion for violating “the Foreign Corrupt Practices Act (FCPA) by engaging in a systematic practice of paying bribes to foreign government officials to obtain business.” The SEC named six countries, including Russia. The US authorities assessed the corrupt payments for medical devices in Russia from 2001 to 2007 at $55 million, for which Shamalov was responsible. This verdict had no legal repercussions in Russia.42
At the end of 2010, a greater scandal erupted. A junior partner of Shamalov, Sergei Kolesnikov, who had fled Russia, fearing for his life, revealed that $1 billion of public funding for medical equipment had been diverted to build a palace for Putin in Gelendzhik near Sochi. Somebody managed to photograph the palace, which looks like a tasteful Italian palazzo from the late eighteenth century. Kolesnikov presented the global financial crisis of 2008 as a reason for the aggravated corruption. “Today the corrupt civil servants do not reduce their appetite, but on the contrary increase the size of the kickbacks,” which he claimed were 35 percent for medical equipment.43
Why would a Russian president need a private palace? In a 2012 report, Nemtsov and Leonid Martynyuk detailed Putin’s assets. The president of Russia has at his disposal no fewer than twenty official residences, most of them palaces, whereas, according to Felshtinsky and Pribylovsky, Yeltsin passed only on twelve presidential residences. Admittedly, this was fewer than the twenty-five residences that Joseph Stalin allowed himself, but by any standard it was plenty.44
Kolesnikov gave many interviews. The most substantial was with Evgeniya Albats, editor of Novoe Vremya, in Washington in February 2012. He described how they channeled diverted state funds through multiple offshore companies. Several layers of shell companies were used in multiple offshore havens. In Kolesnikov’s part of the business, there had been more than thirty offshore companies, involving Shamalov and Putin. They were located in places such as the British Virgin Islands and Panama.45
A new revelation was that Kolesnikov clarified that Putin personally owned individual shares in each of these companies. Each person involved (including Kolesnikov) had a specific share that varied from company to company, but the general picture seems to be that the principal partner (in this case Shamalov) and Putin together held the overwhelming majority, while the junior partners, who carried out the actual work, obtained a few percent. It seems plausible that Putin held half the ownership, but Kolesnikov stated that the specific shares varied between companies. An additional bit of spice in Kolesnikov’s story was that Putin and his cronies used n
icknames, as is the custom among Russian gangsters.46
Under Putin strong nepotism has developed. In his 2000 interview book, Putin revealed what counted most to him. “I have a lot of friends,” he told the interviewers, “but only a few people are really close to me. They have never gone away. They have never betrayed me, and I haven’t betrayed them either.”47
Putin has nationalized Russia’s elites. His close friends from St. Petersburg and the Soviet era KGB have educated their sons in Russia, rather than sending them abroad. The children of Russia’s previous oligarchs and state officials have largely emigrated, and the children of Putin’s cronies have taken their place. As the Russia observer Brian Whitmore put it in 2015, the “children of Vladimir Putin’s cronies” are already billionaires, “and most of them are under 40.”48
Unlike their fathers, most of these oligarchs-in-waiting have no graduate training. After college in Moscow or St. Petersburg, they go straight into career jobs at state-owned banks or companies, such as Gazprom, where, after one or two quick promotions, they usually become a vice president of a big state company. Their sisters, meanwhile, are supposed to marry suitable young men.
Among Putin’s golden youth, the sons of his St. Petersburg cronies have done particularly well, usually by working in privatized companies. Nikolai Shamalov’s two sons have made splendid careers. In 2005, his older son, Yuri, became the chief executive of Gazfond, Gazprom’s large pension fund.49
Shamalov’s younger son, Kirill, became—at the age of twenty-five—a vice president at Sibur, the large petrochemical company spun off from Gazprom. From 2011 to 2013, Kirill acquired 4.3 percent of Sibur through an executive stock-option program. Then, in 2013, he married Putin’s daughter, Ekaterina Tikhonova, in a secret ceremony, after which Putin’s wealthiest crony, Timchenko, sold him 17 percent of Sibur at a favorable price. All told, Putin’s son-in-law was worth an estimated $1.3 billion by the time he was thirty-four. Incidentally, Russia’s National Welfare Fund gave the now-private Sibur a cheap loan of $1.75 billion to help build a new plant in Tobolsk in Siberia. Reuters fine researchers noted that this operation had raised the fortune of Kirill Shamalov to $2.85 billion. Unlike in fairytales, no happiness is eternal, especially not in Russia. Reportedly, Ekaterina divorced Kirill in the spring of 2017, and suddenly he lost most of his wealth in an unclear fashion, being left with “merely” $800 million, according to Bloomberg.50
Russia's Crony Capitalism Page 17
