Russia's Crony Capitalism

by Anders Aslund

  For ordinary people it is difficult to fathom why anybody would need that much money, but former Kremlin adviser Stanislav Belkovsky has a good answer: “This is the principle of plutocracy (monetokratiya), the power of money, which exists in Russia today.” Because property rights are not safe in Russia, you need political power or strong political connections to maintain property, which requires a lot of money. In today’s Russia, money is power, and power is money. If you lose one, you may lose big. Ask Khodorkovsky! Therefore, the Putin group tries to keep both.43

  In 2007, Belkovsky claimed in several interviews that Putin had acquired $40 billion through his cronies during his eight years in power. Until then, it had been presumed that his cronies held “his” wealth in their names, but Belkovsky stated that Putin owned shares of companies outright, which was later borne out by Sergei Kolesnikov’s detailed testimony in 2011. Belkovsky claimed that Putin owned a 37 percent stake of the big oil company Surgutneftegaz, 4.5 percent of Gazprom, and at least half of Timchenko’s Gunvor.44

  The ownership of Surgutneftegaz has been notoriously opaque, and together with Putin Timchenko seems to have swapped his investment in the Kirishi oil refinery for shares in Surgutneftegaz. Nemtsov and Milov set Putin’s share in Gazprom higher, at 6.4 percent of the shares, issued to him during the restructuring of Gazprom’s ownership in 2006. Gunvor has strongly disputed that Putin is an owner, but it has long acknowledged a third secret owner, holding 10 percent. More recently, the secret owner was revealed to be Putin’s childhood friend, the butcher Petr Kolbin.45

  Belkovsky, who is currently an independent intellectual, has been asked repeatedly about Putin’s wealth. In 2012, he assessed it at $70 billion. His most recent statement appears to be from 2013, when he claimed that Putin’s wealth had reached some $100 billion and that Putin held his wealth in stocks, still in Surgutneftegaz and Gazprom as well as in a third unnamed company.46

  The numbers appear reasonable, but it is implausible that Putin kept his Gazprom shares. The collapse of its stock price and the notoriously low stock price of Surgutneftegaz indicate that Putin does not care about their price. Instead, the large capital outflows suggest that he has put his money in more reliable assets abroad. A plausible interpretation is that Belkovsky had real inside information in the mid-2000s, when he was close to the Kremlin, whereas his later numbers and their lack of detail are the result of extrapolation or guesswork.

  In 2015, Bill Browder entered the stage, claiming that Putin possessed a personal wealth of $200 billion. In July 2017, Browder stated in testimony before Congress: “I estimate that [Putin] has accumulated $200 billion of ill-gotten gains from these types of operations over his 17 years in power. He keeps his money in the West and all of his money in the West is potentially exposed to asset freezes and confiscation. Therefore, he has a significant and very personal interest in finding a way to get rid of the Magnitsky sanctions.” Browder’s argument is that Putin has demanded half of the wealth of the Russian oligarchs, which is about $400 billion. This is a vast sum. If Russia’s total capital outflows since 1991 have totaled $780 billion, Putin himself would have appropriated more than one-fourth. This makes a lot of sense. The biggest gift identified in the Panama Papers is $259 million from the private businessman Suleiman Kerimov. We do not know whether Kerimov was a business partner of Putin or was simply extorted. Both are possible, but in any case, Putin and his friends would have received a lot of money.47 Kerimov was sanctioned by the US government on April 6, 2018.

  An alternative method of assessing Putin’s wealth is to assess capital flows in which Putin may have played a part. To judge from the examples in Kolesnikov’s testimony, the share reserved for Putin from all the crony business was nearly half. My guesstimate of the Putin crony group’s capital outflow above is $15 billion–$25 billion a year since 2006, or some $195 billion–$325 billion. Assuming that Putin’s share is half, he would have transferred $100 billion–$160 billion to offshore havens. These numbers are higher than those suggested by Belkovsky, though lower than those offered by Browder.48

  I arrive at five conclusions:

  1. Putin personally holds tens of billions of dollars of assets abroad, probably in the range of $100 billion to $160 billion;

  2. These assets are held secretly, deeply concealed in anonymous offshore companies;

  3. Even the ruler keeps his money abroad, because he knows that it is not safe in Russia;

  4. His vast wealth abroad makes it possible for Putin to buy politics in Russia and many other countries; but

  5. Because his fortune is held abroad, Putin is highly vulnerable to transparency and effective Western financial sanctions.

  The Russian Forbes rich list includes not only the by-now well-known cronies (Timchenko, three Rotenbergs, Kovalchuk, and Shamalov) but also four old friends of Putin in the Putin circle: Petr Kolbin, Sergei Roldugin, Vladimir Litvinenko, and Il’gam Ragimov. These four all knew Putin early on in St. Petersburg and have become fantastically wealthy for no other apparent reason.49

  Putin’s childhood friend Petr Kolbin was a butcher and later a professional gunner in St. Petersburg. In 2005, he became a shareholder in Gunvor, but as mentioned earlier, his stock ownership was kept secret for many years. In 2009, he bought stocks in the Yamal liquefied natural gas plant from Gazprombank very cheaply for $90 million, and a few months later he sold them at the normal market price of $526 million. A government commission chaired by Putin, who was then prime minister, made that decision. Since 2012, Russian Forbes has assessed Kolbin’s wealth at $550 million.50

  The publication of the Panama Papers in the spring of 2016 revealed that a publicly known childhood friend of Putin, the cellist Sergei Roldugin, had received more than $2 billion in offshore wealth from Russian oligarchs and the Russian state without having had any possibility of earning it. He is understood to hold money for Putin. The Organized Crime and Corruption Reporting Project has published an insightful analysis of Roldugin’s income. Much of the money comes from the stock and contract manipulation of Russian state companies. In 2010, a company linked to Roldugin bought shares of Bank Rossiya and sold them just days later to an unknown investor for thirty-two times the price. Another source is “donations” from big private Russian businessmen, which should be called extortion. A third source is bank loans. VTB’s subsidiary in Cyprus gave Roldugin’s company a credit line of $650 million. As with VEB, VTB has suffered massive losses on loans like this that have never been paid back. Seemingly to cover its tracks, VTB sold this subsidiary to Bank Otkritie, which went under in 2017.51

  A third private friend of Putin is Vladimir Litvinenko, the alleged author of Putin’s doctoral dissertation and president of St. Petersburg Mining Institute, where in 1996 Putin defended his doctoral dissertation. Russian Forbes assesses Litvinenko’s wealth in 2017 at $850 million, and he has made this fortune on Apatity, the company that the Russian prosecutors accused Khodorkovsky of having bought too cheaply in a privatization.52

  A fourth, until recently unknown, personal friend of Putin is Il’gam Ragimov, who was a classmate of Putin and Bastrykin, the head of the Investigative Committee, at the law faculty at Leningrad State University. Russian Forbes assesses Ragimov’s wealth at $500 million.53

  None of these four men seems to be a businessman. New York Times correspondent Steven Lee Myers visited Roldugin and concluded that he was not even aware of the immense wealth held in his name and that he seemed to live quite humbly. The only plausible explanation is that these four men are caretakers, holding parts of Putin’s wealth in their own names.54

  The whole phenomenon is intriguing. Is Putin so insecure that he feels compelled to engage his trusted childhood friends to hold his wealth? The same is true of his cousins, who have benefited greatly from his power and wealth.

  Most of Putin’s and his cronies’ wealth is undoubtedly held in the West because of the lack of real property rights in the former Soviet Union, but a new awareness has arisen in the West
of the hazards of anonymous companies.

  The reasons for the reaction against anonymous companies are many. Governments remain concerned about terrorist financing and large-scale tax evasion, but the threat to national security is a far greater concern. Russian hybrid warfare through corruption and election interference has created a new scare, especially in the United States. Special Counsel Robert S. Mueller III is investigating Russian interference in the US presidential election of 2016. One of his indictments accuses the Russian military intelligence agency, GRU, of financing its hacking of the Democratic National Committee through anonymous transfers via cryptocurrencies.

  For years, numerous nongovernmental organizations, notably Transparency International, Global Witness, and Global Financial Integrity, have campaigned against corruption and anonymous companies. In the United States, forty NGOs have formed the Financial Accountability and Corporate Transparency (FACT) Coalition to coordinate these efforts.

  Western concerns with Russian actions through anonymous companies grew intense after Russia’s surprise attack on Ukraine in 2014, which seems to have been a catalyst of similar effect as the 9/11 terrorist attacks in New York and Washington in 2001, which engendered the Patriot Act, which in turn cleaned up the global banking system. Legislative efforts to open up and disarm anonymous companies have been pursued mainly along three geographical lines—through the European Union, in the United Kingdom, and in the United States.

  The European Union has taken the lead. On May 20, 2015, the European Parliament and the European Council adopted the Fourth Anti-Money Laundering Directive. It requires all enterprises and entities in the twenty-eight countries of the European Union and the European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland) to reveal their ultimate beneficiary owners. They must be registered in a centrally held registry in each member state. This obligation also applies to business owners residing outside the region who operate within it. A beneficiary owner is defined as the owner of 25 percent plus one share of an entity.55

  An EU directive has no direct legal impact but calls on all member states to adopt appropriate national legislation within two years. Most countries usually delay action, and in this case only Germany, the United Kingdom, and Denmark complied with the two-year deadline. Yet however slowly the European Union acts, it does act. Most member countries have legislation under way. The directive calls on countries to make their central registries available to relevant authorities, such as financial intelligence and tax authorities, but many countries plan to make their registries available to the public, namely Denmark, Estonia, Finland, Lithuania, the Netherlands, Poland, Portugal, Slovakia, Slovenia, and Sweden.56

  The United Kingdom has made great strides in its anti-money-laundering legislation, but UK transparency is actually less, because British legislation allows so many peculiar forms of legal entities. Further------more, the many overseas British territories operate independently, and London is the dominant financial center in Europe. Of course, Britain’s vast sector of anonymous companies has many well-paid legal and financial helpers. On paper, the British legislation should lead to the revelation of all beneficiary owners, but so far it has not happened.57

  In 2018, the United Kingdom introduced a new legal tool, “unexplained wealth orders,” which allows British authorities to claim property in a civil recovery process if the legal authorities can prove that the wealth cannot have been earned honestly. It remains to be seen whether this tool will be used. In a controversial move in May 2018, Parliament legislated that fourteen British overseas territories, including the key financial centers the British Virgin Islands and the Cayman Islands, must introduce public ownership registries by the end of 2020.58

  In the United States, important measures have been undertaken within the current legal framework. On August 22, 2017, the US Treasury FinCEN required “U.S. title insurance companies to identify the natural persons behind shell companies used to pay for high-end residential real estate in seven metropolitan areas,” including Miami-Dade, Broward, Palm Beach, New York, and Los Angeles, all favored destinations for Russians. They start at different price levels, such as at $1 million in south Florida. These checks focus on cash and wire transfer payments. As a consequence, anonymous purchases of real estate have fallen sharply in the whole country.59

  As this is being written, several legislative initiatives are under way in Congress to prohibit anonymous companies. The basic idea is that FinCEN should be entitled to collect information on all beneficiary owners of corporations or limited liability companies from states that do not collect this information themselves.60

  To sum up, a reasonable assessment is that private Russian assets held anonymously abroad are about $800 billion. This is private wealth, not belonging to the state, but much of it belongs to public officials. The owners’ prime objective is to keep the assets safe, which is not possible in Russia or other countries that lack the rule of law. Second, the owners want to hide their ownership, which they typically do through multiple layers of shell companies. Third, big undercover investors need countries that have great financial depth. Only two countries comply with these three prerequisites: the United States and the United Kingdom.

  The Russian holders of large offshore wealth can be divided roughly into those who made their money before Putin and those who have benefited from Putin’s assistance. These two groups should receive completely different treatment. A big question is how much of the Russian offshore wealth belongs to Putin and his cronies versus other Russians. Browder has given a clear answer: Putin and cronies have taken over half of it. That would be $400 billion, which sounds like a reasonable estimate.

  These vast holdings of anonymous Russian wealth in the West amount to a major national security concern. After the recent Russian interference in the US and other Western elections, people are exasperated by the ruthlessness and imagination of Kremlin actions. But the opposite point is that Kremlin operators can do little if they do not have access to the US financial system, and the US government can easily cut them off if it imposes one simple condition: Tell us who you are! Both the United States and the United Kingdom need to prohibit anonymous ownership for the sake of national security, as most EU countries have already done. Even more obviously, the United States must no longer allow money laundering through real estate or law firms. The simple rule should be that all international financial flows must be subject to ordinary bank regulation.

  S • E • V • E • N

  From International Economic Integration to Deglobalization

  Postcommunist Russia has found it difficult to find its place on the international stage. Two opposing trends have coexisted. The Russian intellectual and commercial elite has embraced globalization, whereas security interests have become anti-Western. Since 2012, the beginning of Putin’s third term, the protectionist tendencies have gained the upper hand. Chief economist at the European Bank of Reconstruction and Development Sergei Guriev has summed up Russia’s situation: “The real cost of Russia’s current isolation will be felt in the long term: the country will miss opportunities for growth and will continue to stagnate.”1

  In the early 1990s, no clear idea of Russia’s role in the world existed. The Soviet Union was gone. Trade policy was not an urgent concern, since Russia mainly exported oil, unhampered by trade barriers. Years of disinterested trial and error ensued, but the Russian government has been unable to find a satisfactory solution. Politics have further complicated Russia’s trade conundrum. Moscow has been all too keen to impose unilateral trade sanctions on neighboring countries, and in 2014, the West imposed sanctions on Russia because of Russia’s annexation of Crimea and invasion of eastern Ukraine. The outcome has been growing alienation between Russia and the West, even though the Russian elite and Russian capital are deeply integrated into the Western financial system.

  Russia’s geography—a big continental power with high transportation costs and few ports—adds to the complications.
When oil prices were high, oil and gas accounted for two-thirds of Russia’s exports. Metals comprised another 20 percent, and arms 4 percent. These exports encountered few trade barriers, limiting Russian interest in trade policy.

  The Soviet Union imploded suddenly and dramatically in December 1991. Dissolution seemed inevitable. The dominant concern was that the collapse be peaceful, and the Soviet Union managed to avoid the bloody civil war that befell Yugoslavia.

  The former Soviet republics needed an organization to manage their mutual relations. Eleven of them signed onto a loose association, the Commonwealth of Independent States (CIS), which Georgia later joined. Turkmenistan and Ukraine never ratified the CIS treaty and were thus not formal members. Ukraine tended to participate in summits, whereas Turkmenistan kept a neutral distance.

  The function of the CIS was left undetermined for years. The two chief models were the British Commonwealth and the European Union. Almost every year, Russia attempted to set up a new organization with some CIS countries, but nothing seemed to work. Apart from Russia, the most interested countries were Belarus and Kazakhstan. These two republics were highly dependent on Russia for geographical reasons, and they preferred to deal with Russia in a multilateral framework rather than being left one-on-one with the Kremlin. The most successful cooperation effort was probably the multilateral CIS free trade agreement of 1994. Although it was never ratified, it formed the basis for similar bilateral free trade agreements among the CIS countries.2

  The worst economic costs of the collapse of the Soviet Union were caused by the tardy breakup of the ruble zone, which lasted until September 1993. Fifteen central banks competed in issuing the largest volume of ruble credits in order to extract the largest share of the common GDP. This competition generated hyperinflation in all the Soviet successor countries. In 1992–1994, state trade with prices far below the market level prevailed between these countries, which resulted in a massive decline in mutual trade of some 70 percent. The very system forced Russia to give large involuntary credits to all the other post-Soviet countries. Great arbitrage opportunities in energy benefited old state enterprises and a few budding oligarchs. Russia’s imperial past and its continued economic and political dominance rendered the other former Soviet republics suspicious of Russian initiatives for cooperation.3