From the World Cup in Russia to the much-anticipated summit with President Trump in Helsinki, Vladimir Putin seems to be basking in the world’s attention these days. But beneath the shallow pageantry, the core essence of Putin’s regime is all too easily forgotten. First and foremost, today’s Russia is a large-scale transnational kleptocracy, one that embezzles and steals billions and that uses Western safe havens to keep its dirty money. While Putin struts his stuff on the world stage, new revelations from Panama come as a timely reminder of this truth.
According to Russia’s Novaya Gazeta, the business empire of Sergey Roldugin, the billionaire cellist and close friend of Vladimir Putin, has officially come under investigation in Panama. The newspaper, which partnered with the Organized Crime and Corruption Reporting Project (OCCRP) and the International Consortium of Investigative Journalists (ICIJ) in the original Panama Papers investigation, reports that Roldugin’s Panama offshore company International Media Overseas S.A. (IMO) is suspected of financial crimes; the case is being led by the organized crime department of Panama. The news comes after an earlier criminal case against IMO had been opened by the British Virgin Islands authorities. These stand out as the first official criminal investigations into the Russians mentioned in the Panama Papers.
IMO is one of the pillars of Roldugin’s offshore empire, as first revealed in the major leak from Panamanian corporate service provider Mossack Fonseca in April 2016. For example, IMO simultaneously signed two deals with the state-owned Rosneft: the sale agreement to buy Rosneft’s shares and an agreement terminating the sale agreement. The latter bound Rosneft to pay IMO a penalty of $750,000 for the sale failure. Thus the money from the state-owned Russian company went directly to IMO’s offshore bank accounts in Panama.
Another simple scheme used by IMO was to buy shares of particular Russian companies—whether state-owned or owned by friendly oligarchs—only to sell them back the very next day with premiums worth half a million dollars each on a deal.
Such schemes are par for the course for Roldugin and his fellow kleptocrats. In 2011, for example, the BVI-based Sandalwood Continental loaned $200 million to a certain Cyprus-based Horwich Trading Ltd. The next day, Sandalwood transferred the right to the debt to the BVI-based Ove Financial Corp. The latter paid $1 for the deal and the very same day compensated the spent $1 by reselling the debt to IMO. Later it was revealed that Sandalwood Continental was controlled by the sanctioned Rossiya Bank, owned by Yury Kovalchuk—a close friend of Putin’s who is known as his personal banker.
Another offshore company of the unusually wealthy musician Roldugin, the BVI-based Sonnette Overseas, used the same scheme. Thus, in 2007 the company was provided a $6 million loan by another offshore company, Levens Trading, at a 2 percent interest rate. A few months later, the lender waived the debt for a $1 premium from Sonnette Overseas. According to official data, Levens owned 100 percent of the billionaire Alexey Mordashov’s Severstal subsidiary Severstal Vtormet.
Some of Roldugin’s deals were worth millions; others, tens and even hundreds of millions—all adding up to nearly $2 billion in his offshore accounts. The conventional wisdom in Russia is that the Panama schemes allowed friendly oligarchs and businessmen to funnel money toward Vladimir Putin, for his personal enrichment. Roldugin, as an old-time friend, was a trustworthy person to control the bank accounts.
What is mind-blowing, though, is the way state-owned companies, primarily Rosneft, embezzle their money. The Roldugin schemes offer yet more proof that the so-called privatization of 19.5 percent of Rosneft in 2016-2017 was anything but a fair sale of a governmental asset to private owners. I previously suggested that the scheme was initiated to make the share, or part of it, end up in accounts controlled by Putin’s men. So far, the murky financing schemes (with the state-owned VTB providing a loan for a deal buying an asset from the state), and the sudden change of owners confirm my suspicions. (The initial buyers, a consortium of Qatar Investment Authority and Glencore, tried to sell the shares to the Chinese oil giant CEFC, and the deal should have been financed again by VTB. But this spring CEFC filed for bankruptcy. The latest news is that QIA wants to buy out Glencore’s share).
The scheme of the cash withdrawal itself is as old as time. Russia’s financial system is designed to encourage such schemes, as the law doesn’t allow Russian residents to freely send money abroad. Russia’s currency control system imposes transfer limits of the equivalent of $5,000 and $10,000 per day for private citizens and corporations, respectively. For larger transactions a sale contract is needed. That is how millions of fake sale contracts are made in Russia every year allowing Russians to legally transfer money abroad. That is how money ends up in offshore accounts and is transferred through fake sale contracts or loan agreements, as in the Panama arrangements.
Of course, none of the Panama revelations has led to prosecution in Russia. Ironically, though, the owners of Summa investment holding, the Magomedov brothers, were brutally arrested, put in jail and now face sentencing on organized crime charges for using the very same scheme. Russian investigators claim that Zuyavudin Magomedov sent $18 million to a Scottish limited partnership as payment for imports of Ukrainian grain which never took place.
The same scheme of fake loans was used in the notorious Moldovan Laundromat case, when nearly $20 billion was withdrawn and laundered through banks in Moldova. Two foreign dummy corporations signed a loan agreement with two guarantors, a Moldovan and a Russian company. The debtor failed to repay and the lender filed a lawsuit to the Moldovan court suing the guarantors. The Moldovan court, a participant in the scheme, ruled in favor of the debtor. As RBC explains, “because there is a Moldovan citizen in the deal, the lawsuit is filed to a Moldovan court, where a corrupted judge rules that the Russian company, one of the two guarantors, has to pay the debt. The court assigns a bailiff who is also a member of the scheme, the bailiff then opens an account in Moldindconbank where the Russian company transfers the money.” Needless to say, the Moldova scheme was carried out under the FSB’s krysha.
Over the years, Russia’s kleptocrats have become quite adept at these money-moving maneuvers. But there is an obvious downside for their enablers in the Kremlin: once money has left Russia, it is usually gone for good. No matter how hostile the West might be toward Russian oligarchs, Putin has had no takers on his bids to get their billions back to Russia. Russia is a treasured place to steal budget money and make billions on dirty and illegal schemes, but on the flip side, the country is no haven for keeping money safe. Even Putin’s own cronies are loath to bring their money back from abroad.
The best example here is the Chelsea Football Club owner Roman Abramovich, who preferred to relocate to Israel instead of going back to Russia when the Brits didn’t extend his business visa. Abramovich is part of the Family, a powerful clan of people whom Vladimir Putin guaranteed personal and financial safety. Unlike other compatriots, Abramovich parted from his oil business in Russia years ago on good terms and with generous compensation. He has no powerful enemies, unlike the Magomedovs, whose assets he is allegedly trying to buy on the cheap now that they are in jail. And yet even he doesn’t take the risk of bringing his money back to Russia.
The lesson for the West is clear: the anti-kleptocracy crusade should be proceeding full speed ahead. Closing the legal loopholes that allow Russia’s kleptocrats to stash their plunder abroad may not cleanse Russia, which will remain hopelessly mired in corruption so long as Putin is in power. But it will help ensure that Western democracies never become as corrupted as Russia is today.
