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Monday, February 18, 2008

Another Original LR Translation: Nemtsov on Putin Volume I, by Essel, Part I

Putin: The Bottom Line by Boris Nemtsov (pictured) and Vladimir Milov is an excellent exposition of the whole Russia problem, calmly and clearly laying out everything we already know about Russia's problems.

What makes it interesting is that it is a clear-eyed look at the country by one of its own nationals. What a contrast this presents to the usual outpourings of rubbish thinking from benighted Russia. It's a essay every Russian should read and that every Western politician who has to deal with Russia should have in his armoury or be made to read.

I propose to provide readers of LR with a “serialised” translation, i.e. chapter by chapter, and then to produce a unified PDF document whose link will be posted in LR's sidebar for permanent reference. The contents of the report are as follows, preceded by an introduction:

1. Corruption is Corroding Russia

2. The Forgotten Army

3. Oh, the Roads...

4. Russia Dying out

5. The Pension Crisis

6. Basman Courts

7. Flouting the Constitution

8. The Collapse of the "National Projects"

9. Enemies All Around. Except China

10. Worsening Inequality

11. Economic Bubble

12. Conclusion: The Alternative

So for today’s installment, here is the introduction and Chapter 1. Chapter 2 will appear in Wednesday's edition.

* * *

Putin: the Bottom Line

by Boris Nemtsov

First Deputy Prime Minister of the Russian Federation, 1997-1998


Vladimir Milov

Deputy Minister of Energy, 2002

Translated from the Russian by Dave Essel

The eight years of Putin’s rule are coming to an end and the time has come to take a look at the bottom line. Many placed great hopes in Putin’s presidency. Some results have been achieved: official propaganda like to make much of the fact that during the years of his rule (2000-2007), the country’s GNP has gone up by 70%, real incomes have, according to the statistics, have more than doubled and poverty has been reduced with the number of people with incomes below the official subsistence level down from 29% in 2000 to 16% in 2007. The budget has a surplus and the state’s financial prospects higher than ever: in January 2008 Russia’s gold and foreign currency reserves reached 480 billion dollars, third largest in the world after China (which has over 1.5 trillion) and Japan (980 billion). The Russian Stabilisation Fund has grown to 157 billion dollars.

All this is true. But it’s only the lesser part of the truth. There are other results of Putin’s rule which are not covered by the state media. And these are shockers. During the years of Putin’s rule, export prices of oil amounted to an average of $40 per barrel while recently they have been over $60. For comparison: the average prices of oil during the Yeltsin years stood at $16.70. The colossal opportunities opened up by high oil prices should have been used by Putin to modernise the country, carry out economic reforms, create a modern army, and establish public health and pension systems.

None of this was done. The army, the pension system, public health, secondary education, and the road system have all degraded. The economy is not doing well either: a stroke of luck was the main reason it was possible to bring relative order to the financial sphere but it also created bubbles in the share markets and in real estate while investments in the real parts of the economy have risen very cautiously while production capability has not been modernised during this time. The opportunities offered by the oil windfall have been missed. As under Brezhnev, super-income from the export of oil and gas have to a large extent been frittered away and necessary reforms left undone.

As a result, as we reach the end of Putin’s presidency, we once again find ourselves with the stable empty and the door open – without a social security system that works properly, facing a growing deficit in the pension fund, with an army straight out of the last century, with state companies in immense debt, and with a level of corruption completely unprecedented in all of Russia’s history. Furthermore, despite the fact that some oligarchs have been sent into exile or put into prison, the remainder continue to enrich themselves – Russia is looking to lead the world in number of billionaires. The increase in the wealth of some oligarchs – for example, Putin’s friends and Russia’s richest man Roman Abramovich – has come straight from government funds. But it all could have been otherwise.

It all could have been otherwise – Russia could have taken a different road. In the 1990s, we experience the collapse of the communist system, the results of which were far more serious than had been expected. Despite that, however, the economy began to grow before Putin came to the presidency: in 1999 GNP rose by 6.4% and industrial production by 11%.It proved possible to reduce crime in the second half of the 1990s (crime figures began dropping in 1996-1997), mortality rates and falling birth rates, all of whose roots went back to Soviet times (rising crime rates and falling birth rates were first noted in the second half of the 1980s; mortality began rising in the early 1970s).

In 1997, after overcoming the most serious consequences of the collapse of socialism and the completion of the semi-reforms of the early 1990s, the Russian government for the first time set out to make systemic reforms aimed at transforming the country into a modern democratic state with a competitive market economy. The loans-for-shares privatisations were stopped and the government began to take action against the influence of the oligarchs. Oligarchic pressuring and the collapse of the state share pyramids prevented these reforms from being completed.

However, many of the ideas from those days were included in Putin’s “first plan” – the programme for socio-economic reforms mooted in 2000 at the start of Putin’s first term. The main heading of this plan were: building of a law-abiding state and of civilised markets, the lowering of bureaucratic barriers, allowing private investments to contribute to the economy, the development of small and middle business, and the implementation of important social reforms. A number of important steps were taken back then, at the start of Vladimir Putin’s presidency – tax and land reform among them. The passing of the Law on Land Ownership put that issue into gear: land, one of the country’s main resources, ceased to belong to no-one and acquired a legal status and a value. The production of a whole series of systemic legal codes and laws brought us closer to having a law-governed state.

From the very beginning, however, Putin’s government distinguished itself by its authoritarianism in the political arena. Many were outraged by the return to the Soviet national anthem, the disbandment of the independent TV channels NTV, TV6, and TVS, and the virtual dissolution of the Federation Council as an independent organ of the state. On the other hand there were others believed that authoritarian modernisation was a possible way for the state to go and many were ready to forgive the state its authoritarian ways if only the country was put in order. But as Viktor Chernomyrdin’s famous phrase has it: “one had hoped for the best but the result was as always." Authoritarianism triumphed under Putin but no modernisation came about from it.

In 2003, when unprecedented pressure was first deployed against business and the decimation of YUKOS was begun, it became clear that we had taken the wrong track. The the further down it we went, the worse things got: falsified Duma and presidential elections carried out with the crudest of uses of administrative resources in 2003-2004; the unsuccessful interference in the Ukrainian elections; the passage of a whole range of laws restricting freedom of speech, assembly, and the activities of political parties and associations; aggressive foreign policies; and a gradual drawing of the country into confrontation with the rest of the world. Russia became ever more a police state. All the reforms of the early 2000s were made to fail and were replaced instead by greedy redistribution. Corruption became rampant. At the same time, state propaganda, as back in Brezhnev’s days, was endless used to brainwash people. “All is fine, life’s better now, life’s happier” says the propaganda from the Kremlin.

This brochure aims to be a sober and realistic analysis of how our live have changed during the years of Putin’s rule. Someone has already coined this phrase: “Life’s better now… but nastier”. We would like to open the eyes of our fellow-citizens to the sort of Russia that Putin and his successors are making for us.

We would like as many Russians as possible to look the truth in the eyes and recognise what is happening to our country. Let people think about these most serious problems lurking behind the icing of official propaganda and shameless dissimulation. Let them understand that these problems will not just go away: the only thing that’s going away is the time of our oil riches

And these issues will have to be resolved. We do have an alternative to propose. But in order to make this happen, we are going to have to take matters into our own hands. Putin’s and his band of men will not lend a hand: their eight years in power has been long enough to make that clear.

1. Corruption is Corroding Russia

One of the worst and blackest results of Vladimir Putin’s presidency has been Russia’s dive into an unprecedented mire of corruption. We are officially one of the world’s top countries when it comes to theft by civil servants. Russia has dropped to 143rd place in the worldwide rating of perceived corruption issued by Transparency International, making our country one of the most corrupt on earth. Our neighbours on the list are Gambia, Indonesia, Togo, Angola, and Guinea-Bissau. We lag far below such countries as Zambia (123rd), Ukraine (118th), Egypt (105th), Georgia (79th), and South Africa (43rd). Back in 2000, we were rather ‘better” placed at 82nd but we have now reached nearly the bottom. According the the INDEM Foundation [TN: "Information Science for Democracy", Russian NGO founded in 1990] the volume of corrupt business conducted in Russia rose from under $40 billion in 2001 to $300 billion today.[1](!). Bribes and racketeering by civil servants is ubiquitous.

Putin has proved even more cunning that the oligarchs and other disciples of corruption who parasited off the reforms of the 1990s. There was plenty of corruption in the 1990s, too, but it was open to view – the free press could report on incidents of corruption with hindrance. In 1997, some members of the government were fired for receiving an advance of $90K each for a book about privatisation. Today’s practitioners of corruption laugh at this pathetic sum.

Today theft by civil servants is measured in billions and is hidden from the eyes of the people: large share-owners cover for dozens of secret beneficiaries, “friends of president Putin”, hiding behind their backs. Information on who the real owners are is carefully protected by the secret services and the subject of corruption in the higher echelons of power is taboo for the Kremlin-controlled media.

Meanwhile, bribery and the convergence of the civil service with business has become the norm at all levels of the government – federal, regional, and local. Spouting phrases about the “revenge of the oligarchs”, Russia is witnessing the rapid enrichment of a new and more powerful Putin oligarch – at your expense and mine. Assets are being removed from state ownership and handed over to the control of private people, property is being purchased with state money back from the oligarchs at stunning prices, a friends-of-Putin oil export monopoly is being created, and a Kremlin “black safe” is being funded. This is a brief outline of the criminal system of government that has taken shape under Putin.

The Oscar-winner in the transfer of important assets into the hands of secret third parties is Gazprom. In just three years, without any kind of tender and by means of an opaque procedure, three important assets servicing the company’s cash flow have been transferred to third-party ownership. The first of these was the Gazprom insurance subsidiary Sogaz: in 2005 its ownership was transferred to divisions of Rossiya Bank in Petersburg. At the time of the transfer. Rossiya Bank’s assets were valued at approximately the same as Sogaz’ worth – $1 billion. However, Sogaz was not sold at open auction but simply transferred into the Petersburg bank’s ownership.

In 2006, Rossiya Bank was handed the management of the Gazfond pension funds which amounting to over $6 billion. In late 2006/early 2007, these funds were used to buy out 50% of the shares of Gazprombank, which by late 2007 was second in assets to Sberbank.[2]

According to the media, Rossiya Bank was set up in 1990 by inter alia the General Manager of the Leningrad District Office of the CPSU, now its chairman, Yuri Kovalchuk, an acquaintance of President Putin’s from his time working in Petersburg. The full list of the bank’s owners is unknown.

One of the largest deals done by Putin’s friends in the Rossiya Bank was the seizure of the giant Gazprom-Media holding, which includes the NTV, TNT, television channels and other media interests. Before Gazprombank fell into the hands of Kovalchuk & Co., in July 2005 Gazprom’s media interests (the Gazprom-Media group and shares in the NTV and TNT televisions channels) were transferred to the bank for a payment of just $166 million[3]. Two years later, in July 2007, vice premier Dmitri Medvedev estimated the value of Gazprom-Media’s assets as $7.5 billion[4]. It would appear that Gazprom gave its assets to friends of president Putin for a fraction of their real worth! Compared to this deal, the loans for shares auctions look like exemplars of honesty and transparency.

“Russia – Land of Possibilities”, cynically proclaim Rossiya Bank’s billboards in central St. Petersburg on the Nevsky Prospekt and by St. Isaac’s Cathedral. Folded into the hands of Yuri Kovalchik, these media assets are not just business. They are a full-scale political resource to be used for mass influence of public opinion. In effect, Kuvalchuk controls a gigantic non-government media holding which todays own four television channels (NTV, TNT, REN TV, and Channel5 St. Petersburg), one of the country’s widest circulation newspapers (Komsomolskaya Pravda), and dozens of other small television and radio stations and newspapers.

This whole gigantic media empire – Putin-media – presents serious competition to the state television channels and other media. Its might is beyond comparison with that of the previous influence of Gusinsky and Berezovsky. It is difficult to imagine that this resource is not going to be used to further Putin’s political interests.

Yuri Kovalchuk’s brother Mikhail head the Kurchatov [Atomic Energy] Institute and recently became acting vice-president of the Russian Academy of Sciences. It is he who is to distribute the 130 billion roubles allocated to nanotechnology development. Yuri Kovalchuk’s son Boris, a former adviser to vice-premier Dmitri Medvedev, now head the Russian government’s department of ‘priority national projects”. This department oversees the funds allocated to “national projects”.

Gazprom is not the only structure to have been looted under Putin. In 2004, as a result of a supplementary share issue at SvyazBank, which was set up in the 1990s specially to serve state communications enterprises, over 50% of the shares ended up in the ownership of a company by the name of RTK-Leasing. Following this share issue, companies in the communications business which previously used the services of other banks began to move the accounts to SVyazBank. In early 2005, the Society for the Protection of Consumer Rights addressed a request to the Public Prosecutor’s Office, the Ministry of the Interior, and the Treasury that review be carried out[5]. However, nothing much was done.

The owner of RTK-Leasing is said to be Geoffrey Galmond[6]. His name is frequently linked with that of the Russian Minister of Information Technology and Communications, Leonid Reiman. But who are the real beneficiaries?

This is how under Putin massive assets are removed for state control and land up in the hands of private individuals.

Another historic deal was the buy-out in September 2005 of 75% of the shares of Sibneft from Putin’s friend oligarch Roman Abramovich for $13.7 billion[7].

The state could easily not have bought Sibneft (at the time of the sale it was the smallest of Russia’s vertically integrated oil companies and had falling production). It could have paid considerably less for it – particularly if one bears in mind that Abramovich originally acquired control of the company for $100 million.

Sibneft, however, was bought for the highest possible, artificially exaggerated[8], price and half of it, furthermore, was financed directly by the state. In June-July 2005 the state, through a company called RosNefteGaz which was specially set up for the purpose, paid Gazprom $7.2 billion and received 10.7% of Gazprom’s shares in exchange[9]. These were the same shares that 12 years previously by a decree of president Yeltsin in 1993 to Gazprom had been allocated for purchase by vouchers[10]. The state could have increased its share in Gazprom for absolutely nothing by using these shares.

Why pay Abramovich over $7 billion from state funds (the rest of the money came for Gazprom’s budget) to increase the state’s shareholding in Gazprom when the authorities to all intents and purposes controlled the company? What can this be called other than diversion of assets?

Why pay $13.7 billion for Sibneft when less could have been paid> And did the payment go to Abramovich? He is said to be the owner of Millhouse, which sold Sibneft to Gazprom. But no-one actually knows the names of the true owners of Millhouse. It is said that Abramovich has an influential partner, co-owner of Millhouse. Who is he?

In fact, why did Sibneft need to be nationalised at all? If it had been bought by private owners, its efficiency would almost certainly not have dropped as it did under Gazprom’s management and the state would not have had to pay all that money for it.

Incidentally, according to Gazprom’s accounts, the company’s and its subsidiaries capitalization in mid 2004 included 17.5% of Gazprom shares. By 30 June 2007 – 0.5%[11]. In 2005 the state bought back 10.7% of the shares. Where did the other 6.3% of Gazprom shares, today worth nearly $20 billion, go? Who owns them?

Why does Gazprom divvy up hundreds of millions of dollars of yearly profit from transit fees and re-export of Central Asian gas with the co-owners of the Swiss trader RosUkrEnergo? Who is behind this middleman?

All the above deals done by Gazprom were concluded during the time presidential successor to Putin Dmitri Medvedev was chairman of its board of directors. What role did he personally play in all these deals and is his selection as successor perhaps a result of them?

Yet another affair during Putin’s time is the rise and rise of the business of hitherto unknown Swiss oil trading house Gunvor through which about a third of Russia’s oil exports are effected (almost all of Surgutneftegaz’s production, a considerable proportion of Gaspromneft’s, Rosneft’s and others). This company controls oil exports to the tune of not less than $40 billion annually.

When Putin had only just come to power, a state monopoly on Russian oil exports was actively being discussed. This monopoly was to all intents and purposes introduced, but not as a state monopoly but rather a private one. Behind Gunvor stands Gennadi Timchenko, an old comrade of Putin’s from his St. Petersburg days[12].

In a letter to the British paper The Guardian, another co-owner of Gunvor, Swede Thorburn Tornkvist admitted that the mighty oil trading house does have a “third co-owner”. Who that might be remains unknown.

It is also unclear who owns Surgutneftegaz, Gunvor’s main supplier. It is believed that the company is controlled via a chain of intermediary companies by its current CEO Vladimir Bogdanov. Another version, however, has currency: that back in 2002-2003 Bogdanov sold his shares on to persons unknown, representing the highest echelons of Russian power, that these included Timchenko and possibly also Putin. This still remains to be verified. Other private oil companies (Lukoil, Yukos, TNK-BP) disclosed the names of their true owners a few years ago, but the true structure of Surgutneftegaz’s ownership is still opaque[13].

Catching Putin and his accomplices red-handed is difficult. They cover their tracks of their dirty business too professionally. Evidently they have learnt from dictator Saddam Hussein, documentary proof of whose corrupt activities the Americans were never able to find even though Saddam and his sons bathed in luxury and had to deny themselves nothing.

On the hand, the Russian authorities can sometimes be caught with their hand in the till. In may 2006, the Zurich Arbitration Court rued that the owners of the Bermudan IPOC Fund, which owns a controlling share of cellphone operator Megafon, plundered money in the interests of the fund’s real beneficiary, the unnamed “Witness #7”. The description of witness #7 fully matches that of Leonid Reiman, Minister of Communications, Petersburger, and long-time comrade of president Putin[14]. The nominal owner of IPOC is Danish lawyer Geoffrey Galmond, who also owns TelekomInvest, Interregion Tranzittelekom, and 50% of cellphone operator Sky Link. In November 2007, the British Virgin Islands authorities asked the US counterparts help investigate Reiman’s involvement in illegal activities[15].

But Minister Reiman continues in the nest of health and remains at his post.

There remain too many other unpleasant questions to be asked of Putin and his entourage. Who is the real co-owner of Surgutneftegaz, Megafon, Sky Link, Roman Abramovich's Millhouse, and the powerful oil trader Gunvor? Can it really be that some Danish, Swedish, Finnish, and Chukotsk businessmen have come to own a good half of Russia without sharing with Putin? Where do the colossal sums earned from arms sales by Rosoboronexport’s (headed by Putin’s friend Sergei Chemezov) go? Is it true, as reported in the media, that there is a ‘black safe” in the Kremlin[16], a system for secretly moving cash from unknown sources which is then used to finance pre-election campaigns or other purposes?

It is hardly surprising that experts and political scientists compete in their attempts to estimate Putin’s personal fortune, putting it at $20, $30 billion. Some say even more.

The authoritarian-criminal régime that has taken shape during the years of Putin’s rule threatens our country’s very future. The authorities have everything to lose. If free media ever arise again in Russia together with competition in politics, the black dealings of today’s rulers in Russia will come to the surface. If that happens, they will at best lose their posts and along with that the way to earn billions on the side. In the worst case, they will lose their freedom. The diversion of state assets, firstly of course those of Gazprom, the use of foreign middlemen to purchase Russian oil at artificially lowered prices (which Mikhail Khodorkovsky is accused of and imprisoned for) has become a widespread and much larger-scale practice amongst the many “friends of Putin”.

We need to put a stop to all this. We need to turn over this shameful page in our history. We need people with clean hands to come to power, people without corruption scandals and unsavoury connections in their pasts. We need to radically reduce the powers of civil servants over the country, to limit their authority, in order to pull the rug out from under the feet of corrupt agents and thieves in positions of power. The state should be shorn of powers that it is unfit to hold over enterprises and and their cash flows. We need to see a rebirth of the practice of open and honest privatisation which began to take place in 1997-2002.

There should be limits on how long senior civil servants can stay in their posts – at all levels: federal, regional, and local. This is needed in oder to prevent people from growing into alliances with entrepreneurs and their successors should have the right to openly investigate their predecessors if needs be. There should be a universal principle: serve 8 years and no ‘extensions’, no sleights of hand to maintain your position (like moving on to become prime minister).

We need laws on lobbying, conflicts of interest, on forbidding civil servants and any connected with them to engage in business. We need to disqualify civil servants found to have engaged in corrupt practices so that they can never again in their lives occupy a civil service post.

We need to reinvigorate our law enforcement system and in particular the part of it investigating corrupt practices. Russia needs an independent Federal Investigation Service in which there is no place for any one affiliated with potential corrupt activities or found to be covering for those accused of serious crimes – for example, during the investigation of the suspects in the smuggling operation run by the Tri Kita furniture company, employees of the Procurator's office and of the Investigation Committee persecuted the investigators in this case.

We need strict public control of the activities of the authorities, a rebirth of freedom of speech, the abolition of censorship on federal television channels, and the establishment of fair conditions for political opposition. There should be open public discussion of such issues as corruption in the government and corrupt civil servants should be found criminally responsible. Journalists should be able to freely investigate corruption scandals.

Independent courts are a vital precondition for the battle against corruption. While the courts remain to all intents and purposes under the control of the executive, there is no way that corruption cases will be looked into objectively or that the guilty will be punished.

The only things that will stop the total looting of Russia are the democratisation of the country, the entry into power of responsible and honest politicians to replace the kleptocracy, the abandonment by Russia of life by the thieves’ code, and a return to the creation of the rule of law.

[1] INDEM Foundation, The Dynamics of Russian Corruption 2001-2005. [TN:]

[2] Sources for this and the previous paragraph; articles in Vedomosti 21 January 2005 – Sogaz sold to Petersburg: Russia’s most profitable insurer won by Rossiya Bank; 23 August 2006 – 3% of Gazprom Placed: Sogaz Purchases Gazfond’s Management Company; 30 October 2006 – Into Reliable Hands: Gazprom Transfers its Bank to Gazfond.

[3] Source: Annual Accounts for 2005 of Gazprombank. These accounts were drawn up in accordance with international financial reporting standards.

[4] Source: Vedomosti, 6 July 2007 – Expensive Media: Gazprom-Media Could Be Worth $7.5 Billion

[5] Source: Vedomosti, 26 May 2005 Postmen and Bankers to Be Checked

[6] Source: Vedomosti, 5 July 2006 – Russian Billions: How much is Geoffrey Galmond Worth?

[7] Source: Annual Accounts for 2005 of Gazprom. These accounts were drawn up in accordance with international financial reporting standards.

[8] Source: Vedomosti, 28 September 2005 – Sibneft Inflated

[9] Source: Annual Accounts for 2005 of Gazprom. These accounts were drawn up in accordance with international financial reporting standards.

[10] Point 4 of Presidential decree #58 of 26 January 1993.

[11] Source: First Semi Annual Accounts for 2007 of Gazprom by international financial reporting standards.

[12] Source: Luke Harding, The Guardian, 22 December 2007 Secretive Oil Firm Denies Putin Has Any Stake In Its Ownership by Luke Harding.

[13] Source: Vedomosti, 3 August 2007 Bogdanov Trusts His People: Surgutneftegaz’s Clerks Manage $½ Trillion Worth of Shares

[14] Source: Vedomosti, 23 May 2006 Witness Nº 7

[15] Source: Vedomosti, 15 November 2007 What Are The Suspicions Against Leonid Reiman? The BVI authorities found “incontrovertible evidence” that the Minister for Information Technologies and Communications had links to the IPOC fund.

[16] Source: The New Times, Issue 44, 10 December 2007 – The Kremlin’s Black Safe


Anonymous said...

I read the full Russian version. It is amazing! I have yet to see someone summarize so well the challenges facing Russia under the reign of Putin. It is a shame that most Russians will never have an opportunity to read it. However, as long as there are still Russians like Boris Nemtsov, then there is still hope.

La Russophobe said...

Well said, and indeed it makes clear why Putin felt the need to exclude him from presidential contention.