Amid the huge volume of news in recent days, an excellent series of investigations, "Crony Capitalism," produced by Reuters' special investigative journalism unit — Reuters Investigates — has gone somewhat unnoticed.
Under normal circumstances in a democratic country, these investigations would have brought down a government and forced a host of officials to resign. But here, of course, they led to what things usually lead to — nothing. That does not mean investigations should stop; it means public awareness of their findings needs to be strengthened. That is exactly what we are trying to do, as best we can.
Nikita from ACF's investigations department (you may remember him from the piece on sanctions) has read everything very carefully and offers this short overview of the most interesting parts. Read it and pass it on:
Last week, Reuters published the results of a major investigation into corruption in Russia. The publication is divided into three parts, each describing specific corruption schemes uncovered by the journalists. All three parts (1, 2, 3) are available in Russian on the agency's Russian website.
Several Russian media outlets ran brief items on the investigation, but not all of them dared to spell out the essence of what the reports actually said. Since the subject of these publications is, frankly, very close to the Anti-Corruption Foundation, we decided to prepare our own summary — a short retelling of what Reuters reported.
Part One — Putin's Associates Build "Putin's Palace"
In this part, Reuters explains the origin of some of the funds used to build the so-called "Putin's Palace" on Cape Idokopas. Reuters' investigation is, in effect, an interesting continuation of two older stories.
The first story is about how Russia's national "Health" project was implemented. One of the project's main stated goals was to provide the population with high-tech medical care. To do this, expensive foreign equipment was supposed to be purchased and installed in existing and newly built Russian hospitals. The equipment was indeed purchased — but at prices far above market rates, or, put simply, someone made a great deal of money from it (that is, stole a great deal of money). The best-known episode in this story is the procurement of CT scanners, which you can read about here or here.
The second story is about how, 20 kilometers (about 12 miles) from Gelendzhik, a huge palace of unknown ownership had been under construction since 2005, and it is widely and plausibly believed to be another of Putin's "unofficial" residences. In 2010, a man named Sergei Kolesnikov wrote an open letter to President Medvedev stating that the "palace was paid for mainly with money that Russian businessmen 'donated for the use of Prime Minister Vladimir Putin,'" and asked for an investigation — which, for some reason, never followed. Among the alleged donors financing the palace were Nikolai Shamalov and Dmitry Gorelov, longtime Putin associates from St. Petersburg; Shamalov was also a member of a certain modest dacha cooperative (a country-home association), which brought together a number of gifted businessmen and officials.
Reuters' investigation links these two stories together. Documents reviewed by the agency's journalists confirm that the construction of "Putin's Palace" was financed in part with funds allocated for the purchase of medical equipment.
The "financing" scheme looks like this: ● An authorized state agency signs a contract with Petromed CJSC (co-owned by Gorelov) and transfers the funds; ● Petromed CJSC transfers the funds to Greathill Limited (registered in the UK, co-owned by Shamalov and Gorelov); ● Greathill Limited transfers part of the funds to Siemens for the supply of medical equipment, and part to Lanaval (registered in Belize); ● Lanaval transfers part of the funds to Medea Investments (registered in the United States) for the supply of exclusive finishing materials. Medea Investments is linked to a well-known Italian architect, who confirmed his work on the palace. And finally, the last stage, which was probably not all that important to most participants in the scheme: ● Siemens supplies the equipment to Petromed CJSC, which then passes it on to the authorized agency.
One could say that purchasing equipment through two intermediaries is normal and entirely permissible. The only problem is that, according to Reuters' estimates, the price the state paid for this equipment was inflated by roughly a factor of two. Incidentally, the equipment in question was CT scanners.
So it turns out that by doubling the price of medical equipment, the intermediary was left with substantial funds, which were then used to build "Putin's Palace" — meaning that the palace was effectively built with stolen state money. It is hard to call that normal or entirely permissible.
Incidentally, ACF considers this method of building palaces morally outdated. Why invent complicated schemes and steal money through state procurement when you can simply build yourself another residence directly at the state's expense? For example, under the banner of Olympic preparations.
Part Two — Putin's Associates Build Hospitals
The second part of the investigation describes how Shamalov and Gorelov took part in the construction of 15 modular hospitals across Russia as part of the national "Health" project. Modular hospitals are assembled like construction sets from standardized units manufactured at a specialized plant. The total budget for the project was estimated at $1 billion.
A foreign contractor took part in the project and received less than 30% of the total project value for module sets for seven hospitals. Russian companies also participated in the project — UK Modul and Rosmodulstroy — both co-owned by Shamalov and Gorelov.
Presumably, the Russian companies were supposed to produce modules for the remaining hospitals, and they received nearly $500 million for doing so — but something went wrong. Delivery deadlines were missed, the modules did not fit together, and UK Modulstroy demanded "even more money." The Russian companies managed to build only one of the six hospitals; the module manufacturing plant shut down without paying its workers' wages, and the companies went bankrupt, leaving behind only debts.
Foreign suppliers had to be brought in even where Russian-made modules had originally been planned. In the end, 13 of the 15 hospitals were built, the project dragged on for five years, and the budget rose by 70% to $1.69 billion. Does that remind you of anything?
The documents available to Reuters do not make it possible to estimate how much Putin's associates earned, but it is safe to say that the project was far from successful and came at great expense to Russian taxpayers.
Part Three — A Putin Associate Does Business with Fly-by-Night Firms
The third part is devoted to procurement at Russian Railways, headed by Vladimir Yakunin. Vladimir Yakunin and his family have long been among ACF's favorite investigative targets. In less than 10 years, the Yakunin family managed to build a vast business empire, with companies in various countries and operations in different sectors — but with business interests consistently tied to Russian Railways.
Reuters' investigative journalists found that Russian Railways signed contracts for goods and services with organizations showing the hallmarks of fly-by-night companies. Funds received by such firms were immediately transferred to the accounts of other organizations, a practice that can be used for tax evasion and to conceal the real beneficiaries. Notably, among the organizations involved in these transactions, not a single one could be found that had shown any meaningful activity in railway construction or repair.
To seasoned readers of Alexei Navalny's blog, such schemes may seem like child's play. So what if Russian Railways works with a contractor registered to some woman from Chertanovo (a district in Moscow), and the registered address turns out to be a children's goods store? And yet, according to Reuters' calculations, more than $1 billion has been transferred to such companies since 2007.
Perhaps these firms, fly-by-night as they may be, won fair and honest tenders? Unfortunately not: according to Reuters' calculations, in tenders worth more than $340 million in total, the competing companies were registered on the same day, at the same address, and had the same general director.
For example, on the Russian Railways website one can easily find this open electronic tender, completed in November 2013, with a total value of nearly 1.5 billion rubles (about tens of millions of U.S. dollars at the time) across several lots.
Two companies mentioned in the Reuters article took part in it: MP Tsentr ZhAT CJSC and TransServiceAvtomatika CJSC. These companies were registered by the same person, on the same day, with bank accounts at the same bank, and had exactly the same number of employees in both 2011 and 2012.
ACF's investigations department (the same one that deciphers the name of a key offshore company in the Yakunin empire — VIY Management — as Vladimir Ivanovich Yakunin) adds that the companies were registered a week after Vladimir Ivanovich was appointed president of Russian Railways.
A close reading of the tender documentation and results shows that the price offers from the "competing firms" differed from each other — and from the maximum price set by Russian Railways — by no more than fractions of a percent. Moreover, in the bidders' applications, some categories of work (such as the construction of temporary structures) differed greatly in the structures supposedly to be built, yet ended up with the same total cost. We assume that Russian Railways executives pass the work documentation to a friendly business structure, which reworks it into tender applications by adding or subtracting tenths of a percent for each type of work, and then enters the "competition" through two companies it controls. This leads to the conclusion that some tender procedures at Russian Railways are merely for show, while in reality the contract is simply handed to one business structure at a price determined by Russian Railways itself. Who stands behind that business structure is something we still have to find out.
What do you think Russian Railways said when Reuters asked it to comment on contracts signed with organizations showing the hallmarks of fly-by-night firms? Russian Railways replied that "the procurement activities of Russian Railways OJSC are carried out in strict compliance with the applicable sector-specific legislation."
Let us recall that Reuters' journalists have documents confirming all of these schemes. The Anti-Corruption Foundation is considering filing criminal complaints with law enforcement authorities based on the facts uncovered by Reuters' correspondents.
ACF also expresses its deepest respect to the Reuters journalists engaged in this difficult but extremely important work.