The Emperor Has No Clothes

I went on a bit of a rant this morning on Twitter, but somehow my tweets got out of order. So I’m putting them up here and adding a bit to my argument.

I have spent a lot of time researching Vladimir Putin and his government. And by “a lot”, I mean that I have been following his career since about 1998. I too bought into the “persona” that was created for him. But as time has gone on, I have realized that that is all it is. Just a character that was created for somebody (anybody?) to play. I’ve said before that you could have picked just about anybody off the street and gotten the same results as we got with Putin. And I still believe that.

But nobody wants to say this. Nobody wants to say that “Putin” is a fraud. And that the emperor has no clothes. Why? The conclusion that I am (reluctantly) coming to is that our politicians and pundits find “Putin” useful. They prop the character up as a kind bogeyman in order to distract from the fact that Russia itself is a genuine threat and a problem.

And people buy into it because they don’t want to believe that the Russian system is rotten to its core. And everybody is infected. It is easier to pretend that the problem is just down to one person: “Putin”. Then you don’t have to deal with the real issues that infect Russian society. The serf mentality. The gulag of the mind (to quote Nina Khrushcheva). The corruption that pervades daily life.

And this “kleptocracy” business is still just dealing with symptoms, not the root causes. I could tell you story after story of the corrupt practices like the one I put up on here on the blog last week, but that’s not the point. People want to imagine that the problem is just money. If you make the problem money, then it is fixable.

But the problem is not the money itself. As I stated last week, the Russian system is not a “kleptocracy”. Rather, it is neo-feudal. And what that means is that the money is being used by the State to pursue its own geopolitical ends.

I know this is an unpopular opinion, but I think it needed to be said. Because fighting the Russian threat is not as easy as ousting an individual person, or even a core group of so-called “kleptocrats”. And the first step in doing that is to realize that your analysis is wrong. And concede that the emperor has no clothes.

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$50 Million Tax Free

In the middle of the unfolding Khodorkovsky drama, a story emerged that another Russian businessman was facing troubles with the government in Moscow. Nikolai Bogachyov had agreed to sell a stake in a project to develop the South Tambey field on the Yamal-Nenetsk peninsula to a consortium of three foreign companies: Spanish Repsol, Shell, and Petro Canada. Bogachyov held the production license for the field, which was estimated to contain reserves of 1.2 trillion cubic metres of gas.

The Russian state-owned natural gas company Gazprom sued, claiming that South Tambey had been theirs to begin with, and was given up in a shady deal by the company’s former leadership. The dispute was finally resolved in an out-of-court settlement in the middle of 2005.

Nikolai Bogachyov’s background is typical of the Soviet nomenklatura. Born in 1955, he lived in New York as a child while his father, Vladimir, worked at the UN as a journalist for TASS (a typical cover for the KGB at the time) from 1959 to 1964. Vladimir returned to the United States at least once after that assignment. He reportedly had an affair with the Communist artist, Alice Neel, in 1969.

The elder Bogachyov was later involved in the formation of Zhirinovsky’s Liberal Democrat Party of Russia (LDRP) in the early 1990s, but soon split off to form his own party, according to a 1994 article in the Washington Post.

Nikolai Bogachyov claimed he walked away with $20 million in exchange for his cooperation with Gazprom in 2005. He had allegedly previously demanded $50 million. Either of these amounts were mere pocket change when discussing the long-term potential of a field like South Tambey.

Whatever really happened behind the scenes is still unclear, but it most likely did not take place as reported. Filings with Companies House in the UK indicate that Bogachyov did walk away with nearly $50 million, tax-free.

Over a period of about 18 months, Bogachyov gave up his shares in exchange for a series “loans”. He first took a loan of $15 million from Switzerland-based commodities trader Glencore, using his shares in Yamal LNG as a guarantee.

Bogachyov then took $20 million from an arm of the Irish-registered emerging markets investment vehicle Ashmore. He again used the same shares as collateral. Using the second loan of $20 million from Ashmore, Bogachyov paid back the $15 million from Glencore. He was now ahead $5 million.

Over the next several months, Bogachyov continued to take loans from Ashmore using the same shares as collateral.

Tambey then transferred these loans to two shell corporations: one in Nassau, Bahamas, and the other in Moscow.  After an appropriate period of time, the two shell corporations were declared insolvent, meaning that the UK company could not pay back the original loan to Ashmore. The UK company then declared insolvency itself, effectively defaulting on the loan. The shares were then transferred to Ashmore, who presumably then transferred them to Gazprom.

But the scam was that both shell companies were associated with Bogachyov. The parent company of the UK-based Tambeygas was the Nassau company Prato Investments Limited. Prato was the recipient of $1,543,096 in loans from Tambeygas. The second company, Moscow-based Ruad Gas Limited received $46,142,618 in loans from Tambeygas. Ruad was also a subsidiary of Prato, and was registered at the same address where Bogachyov’s Yamal Energy Partners was registered.

In the end, Bogachyov walked away with a little under $50 million (less ~$2.3 million in fees), tax-free.

P.S. There is a second part to this story, but I am still trying to untangle it.

Neo-Feudalism

“Kleptocracy” is probably the most common word now used to describe the Russian State. The proponents of this theory argue that President Putin and his cronies are using money from state coffers for their own personal use. This, they say, is the primary goal of the “kleptocrats”: personal enrichment at the expense of the Russian taxpayer.

I’ve spent nearly the past two years looking at the way the Russian Regime is moving money, and I think that this narrative is false.

What is Russia then if not a kleptocracy? The State is not based on thievery for personal gain, though there is some element of that. Russia today is more of a neo-feudal system.

The people commonly referred to as “oligarchs” are not oligarchs in the traditional sense. Traditionally an oligarch has some power over the leadership of a country through his money. But in Russia today the so-called oligarchs are actually beholden to the State. In this sense, they are more like the boyars of old, during the Tsarist period.

At the end of the Communist period, the State gave the boyars their wealth through the dispensing of property (in this case, previously state-owned businesses, factories, etc.). It was up to the boyars to make the most of this gift. The boyars were then obligated to pay tribute to the State from their wealth.

This can take many forms, but one example is what happened at the Sochi Olympics. The boyars were required to pay for the venues, even though they (and everybody else) knew they were loss-making and would most likely never turn a profit. Did they get kickbacks for it? Of course. But the monetary cost was likely higher than any profit made. At the same time, however, the boyars showed their fealty to the State.

But if the State decides that the gift must be returned, the boyar must do as he is ordered. We have seen different cases of this. What typically happens is that the “boyar” has become arrogant enough to believe in his own press. That his wealth is of his own making. That he is not beholden to the State for his success. And that the State has no right to demand its return.

And what happens then? The recent case with the owners of Domodedovo Airport is a good example of how this plays out. An offer was made for the airport by a certain group on behalf of the State. The offer was rejected. And now the owners of Domodedovo are under arrest. They could have gotten some money out of the deal, and returned the airport. But they refused. And their imprisonment is the consequence.

I don’t mean to make the “boyars” sound like victims here because, just like everybody else in this story, they know what they signed up for. They made a deal with the devil. And the devil always demands his due.

But depicting the Russian Regime purely as a vehicle for personal profit greatly misreads the situation and leads to poor policy decisions. The portrayal of Putin and his cronies as some petty gangsters who somehow (!?) managed to make it into the Kremlin is a dangerous one on which to base policy.  In essence you are reducing the goal of the State to nothing more than theft by a small group. A group that you only have to oust to solve “the problem of Russia”.

But history has shown that this is a false narrative. We thought we were getting a better Russia in the 1990s, but as Chernomyrdin said, “it turned out like always”. And if we keep believing this false narrative we will only have ourselves to blame when it once again turns out the same.

 

Russia Is Not Going to Rio

Russia’s track and field team was barred from participating in the up-coming Olympic Games in Rio due to its collective use of banned performance enhancing drugs last week.

Russian track and field athletes have been suspended from international competition since last fall, after publication of a WADA report accusing the nation of an elaborate government-run doping program.

The International Olympic Committee is meeting today to decide on whether Russia will be banned from attending the events entirely.

Meanwhile, the Russian government has portrayed its athletes as the victims of some kind of massive conspiracy:

And the Kremlin’s Dmitry Peskov reiterated the same sentiments:

Russian MP Vladimir Zhirinovsky suggested that Russia boycott the games all together and hold a separate event in Russia.

By now we’ve all heard about the health and safety warnings surrounding Rio. The World Health Organization is under fire for its failure to take the risks seriously. In the same article from late last month:

The International Olympic Committee (IOC) has said it sees no reason to delay or move the Games because of the mosquito-borne disease.

Athletes from all over the world are dropping out of the Games. Others are freezing their sperm in case they acquire Zika while in Rio.

So I can’t help but wonder if the Russian athletes and Sports Minister Mutko aren’t a bit secretly relieved by the recent events.