Wednesday, December 14

Peter Lavelle on Russia's telecom scandal and the Kremlin's nationalization push

December 2
Hullo, Peter!
Greetings from America! I hope all is well with you. Pundita has been ranting again against the Get Putin crowd. I dragged one of your UPI articles into it (Kremlin eyes metals sector), so I thought you'd like to see the post, titled "Applying the lessons they learned from Marc Rich, they bankrupted Russia". John Batchelor invited Gary Kasparov onto his show the other night to rant and rave, which put me in a ranting mood.

Also, would you care to comment at your Untimely Thoughts blog about today's WSJ piece on the money-laundering scandal involving Leonid Reiman? [See end of this post] Thanks!

December 3
Greetings from Moscow! It is good to hear from you. Your comments on the metal industry and other items reminds me how I can be easily misunderstood. Most of the time I try to explain what is happening in Russia without taking a side. On the metals story: it is a "strategic sector" and Putin has made it clear that the state [will be] front and center.

Personally, I have mixed thoughts about this. However, my thesis was that the state is willing to buy out Russia's oligarchs -- not steal from them like in the case of Yukos.

On the Leonid Reiman story, I wrote on it over a year ago.[1] This guy is as guilty as sin but it appears he has done a pretty good job of covering his tracks. As long as he can keep any legal action within the Russian court system, nothing will happen to him.
Peter Lavelle"

Perhaps I did not make my point clear, then, because that is exactly what I understood you to mean. Please see if I have it correctly: (from a heated exchange with a correspondent):

"The Wall Street Journal crowd is not interested in a security zone. They fear that the Kremlin's solution -- the state buying back control of key industries while allowing a certain percentage of foreign investors -- will catch on with other countries. Right now the WSJs are hysterical because they see that the Kremlin isn't stopping with oil and gas; now they're getting set to buy back control of the metals sector.

I bemoaned the conundrum but I think Putin & Co. have hit upon what they hope is the way Russia can avoid a stagnant economy while at the same time protecting against foreign takeover via control of key resources.

Von Hayek would argue that in the long run the patchwork solution can't work. And of course the solution is aleady in effect in Arab oil kingdoms; foreign interests own a stake in the oil companies. But the Russians are not the Arabs.

Russians such as Kasparov are playing back to Americans what Americans want to hear: that Russia is ready at this time to have a government that reflects the American idea of democratic government. I think Putin's view is that before there is a rule of law as Americans envision it, there must first be a nation; i.e., a general agreement on which governing body makes the major decisions: clan bosses or a central government."

Well, Peter, am I in the ballpark? If so (or if not) please advise.

I would be interested in reading your article on Rieman. My specific interest in asking for your comment was about whether you think Reiman's close association with Putin makes a mockery of Putin's attempts to wrest power away from the most crooked oligarchs.

I guess what I'm asking is whether Reiman covered his tracks well enough to fool Putin (hard to imagine) and in any case, now that the cat is out of the bag, will Putin ditch him?

Thanks if you can find the time to give some sort of reply. Frankly, I am deeply suspicious of the timing of the Reiman investigations. Perhaps I am paranoid, but I don't think the American government has taken it lying down that they haven't yet been able to install a puppet government in Moscow. In other words, I think the Get Putin crowd are still working overtime to tar Putin.

Maybe Putin deserves a black eye in this instance but I noticed that the WSJ said nothing about Mikhail Fridman's oil interests -- assuming he still has them.

I certainly don't disagree with you; we are on the same page. Of the course the WJSniki are upset -- they can only get a minority stake in companies that can produce enormous profits, but controlled by the majority share holder (the Russian state) that will not always -- if ever -- focus exclusively on the bottom line.

From a purist liberal market position -- which doesn't exist in reality -- what Putin is doing has considerable downside. Gazprom-Rosneft (what will become "Kremlin-nickel") will have a tendency to crowd out the normal development of a modern economy. That said, if the government is conscious of this problem -- and many are in government -- then a political decision has to be made to ensure the the "crowding out" factor is taken into account.

The record of "national resource champions" is mixed. Norway has gotten it right, will Russia get it right? We'll see. The WSJniki have a point, but they don't understand Russian politics and the country's continuing economic transition.

However, protecting defined "strategic resources" is all well and fine, but last week the state became the majority owner of Russia's largest carmaker AvtoVAZ. Car manufacturing is not a "strategic sector" in Russia by any definition.

On the Leonid Reiman story, you are following the wrong trail. It is the Alfa Group -- Megafon's competitor -- pushing this story. The Alfa Group has seriously important connections in the US, especially media. So I would back away from the political slant and stick with what it is almost always about: MONEY!

[Correspondence continued in tomorrow's post]

Analysis: Russia's 'Telecom-gate
By Peter Lavelle
MOSCOW, Nov. 15, 2004 (UPI) -- Russia's Telecommunications Minister Leonid
Reiman, alleged to have taken a $1 million payment in the early 1990s, is at the center of growing scandal that stands to tarnish and undermine Vladimir Putin's claim that fighting state corruption is an important part of his agenda.

The politics of Russia's telecommunications industry has always been fraught
with charges of favoritism, shady deals and the reality of opaque company ownership structures. Telecommunications Minister Leonid Reiman, since the inception of the Russia's first digital telecoms network in the early 1990s, has been at the center of the industry's development. He is now the focus of a scandal questioning his use of office for personal gain. The potential fallout surrounding the allegations against Reiman could significantly affect Russia's fast growing and very lucrative telecoms industry as well as test Putin's demand that government officials conduct themselves in the same transparent fashion as the business community.

At the end of last month in the British Virgin Islands court, an affidavit was signed by a former Reiman business associate claiming that the then up and coming Leningrad communications official accepted a $1 million payment to "arrange" the establishment of Russia first digital telecoms network. The affidavit, signed by telecoms entrepreneur Anthony Georgiou but only made public last week, states he invested $2 million -- half going to Reiman -- to create the telecom company Peterstar.

The fact that Reiman is alleged to have accepted the payment, while a government official, is not a particularly damaging charge. Considering how businesses were created and run in the 1990s, cash payments to officialdom to grease the works were the norm. For the $1 million payment, Georgiou claims that Reiman secured the 16 ministerial signatures needed to establish Peterstar - a no small feat at the time.

According to court testimony, all state officials involved in setting up Peterstar signed recipients for payments received.

At stake now is how Peterstar, undergoing a number of mutations, has become a major player in Russia's very competitive telecom industry with Reiman as the government official overseeing it.

Peterstar went on to merge with telecom North West GSM, St. Petersburg's largest mobile phone operator, and Sonic Duo -- holding the prized GSM mobile license for Moscow. Collectively, these companies now form Russia's third-largest telecom operator known as Megafon. Reiman has repeatedly claimed that he has no personal interest in Megafon.

In the same BVI court proceedings, Danish lawyer Jeffery Galmond -- believed to have been involved in the development of Russia telecom industry -- said Reiman was the primary beneficiary of a trust indirectly holding shares in Megafon until last year. But Galmond is on the record saying Reiman had not been paid any cash for his financial interest in Megafon.

Doubts concerning Reiman's personal involvement in Megafon have been raised
virtually as many times he publicly states otherwise. In August 2001, Reiman's ministry suddenly awarded valuable mobile operator licenses to Sonic Duo without holding a public tender. Russia's two other telecom giants, Vimpelcom and MTS, called foul pay.

A month before, in what was called the "frequency scandal," Reiman suddenly
re-allocated frequencies favoring Megafon. Only after the personal intervention of then-Prime Minister Mikhail Kasyanov, was Reiman forced to reverse the reallocation.

Then the plot thickened. Who owns what? Who has the right to own what? All of this would be a non-story if the actually ownership of Megafon had not been called into question. The legal proceedings in the BVI were started after Russia's huge industrial and financial group, as well as major telecom player, Alfa Group defended its claim that it owns a 25.1 percent stake in Megafon, purchased from the financial boutique LV Finance for an unclosed amount in 2003.

Another Russian company, IPOC, contests the Alfa Group's claim of legal ownership in Megafon. IPOC directly owns 6.5 percent and 31.3 percent indirectly though still another legal entity called Telecominvest claims LV Finance violated its first right of refusal to purchase shares in Megafon.

As Megafon's ownership structure is debated and most likely decided upon in distant BVI, the political fallout from the court proceedings could not be more embarrassing for Putin's Kremlin. Since assuming office, Putin has used Russia's reinvigorated and empowered state bureaucracy to bring to heel Russia's small clan of super-rich "oligarchs" -- limiting their political power and economic influence. The state under Putin is supposed to protect the Russian economy from unscrupulous business people, not encourage opaque business activities of state officials.

Leonid Reiman is also widely seen to be close to Putin. When Putin ordered a
significant downsizing of government ministries immediately after reelection in May, Reiman lost his job at the Telecom Ministry. Then, suddenly and inexplicably, Putin reversed himself - something he rarely does - and rescinded the government shakeup. The only revision of the original shakeup plan was to return Reiman to his telecom portfolio.

How Putin reacts to "Telecom-gate" will be an indication of whether he accepts double standards among his own inner circle and whether his demand for a fair playing field in the world of business is only rhetoric.
* * * *
Close Putin Ally Implicated in Probe Into Laundering
By David Crawford, Glenn R. Simpson & Gregory White
from The Wall Street Journal
Posted December 02, 2005
A money-laundering scandal that started in Germany has spread to other countries and now implicates a top Russian official who is a close ally of President Vladimir Putin, say law-enforcement officials with knowledge of the situation. In letters to counterparts in other Western countries, prosecutors in Frankfurt have named Russia's telecommunications minister, Leonid Reiman, as a central figure in a German criminal probe. Using financial records, the prosecutors lay out what they suspect was an elaborate scheme to milk Russian state-owned telecom companies for cash or divert their assets.

In their letters, which were reviewed by The Wall Street Journal, the prosecutors say they suspect Mr. Reiman "illegally enriched himself through a series of transactions," and then set up a network of shell companies and trusts to secure and conceal more than $1 billion in assets. The German investigation has spawned parallel inquiries in the U.S., Cyprus and Switzerland.

The corruption allegations are among the most serious ever against a sitting Russian minister. President Putin has worked closely with Mr. Reiman for more than a decade, from the days when the Russian president was deputy mayor of St. Petersburg and Mr. Reiman was executive of a state telecom company. Some of the transactions under investigation date from around that same time.

The investigation has already had repercussions. The German inquiry has led to the resignation of a Commerzbank AG board member. Four other current and former officials of the big German bank are also suspected of money laundering, including Chief Executive Klaus-Peter Muller, whose home and office were searched by German police in August, according to a Commerzbank spokesman. And the investigation has spread to the New York offices of Barclays PLC and other Western banks, according to law-enforcement officials familiar with the inquiries.

Mr. Reiman, who declined to comment for this article, has continually maintained that he did nothing wrong. He says the allegations against him, which came to light as part of a bitter Russian business dispute, are a pressure tactic by billionaire Mikhail Fridman's Alfa Group to fend off a rival claim by Jeffrey Galmond, a longtime associate of Mr. Reiman, to a disputed stake in mobile-phone operator OAO Megafon.

The allegations stemming from the Megafon case rely in part on the testimony of a former Galmond employee who is a convicted felon, and Anthony Georgiou, a former business partner of Mr. Reiman's who has since fallen out with him. Both men, who have given sworn testimony in the civil case, have acknowledged in court that they have agreements to receive compensation from Alfa Group or its allies.

Even so, their testimony is consistent with voluminous financial records reviewed by The Wall Street Journal. The records show a series of large transfers, totaling tens of millions of dollars, moving assets of Russian telecom ventures to shell companies based in Cyprus, Liechtenstein, Switzerland and other tax havens.

Much of the funds then flowed via the New York office of Barclays to a mutual fund based in Hamilton, Bermuda, which Mr. Galmond says he owns. The former Galmond employee in the Megafon case alleged that the tangled structure was designed to conceal the fact that the real owner is Mr. Reiman, something both Mr. Galmond and Mr. Reiman deny.

The German prosecutors' letters and other documents show that they have embraced several of the allegations that emerged from the Megafon litigation about how the alleged corruption scheme worked. It had three phases, according to court papers in the case, each of which allegedly relied on Mr. Reiman's role in directing phone ventures part-owned by the state. [...]

Mr. Reiman isn't a criminal target of Western prosecutors. Most of the countries involved in the latest investigations don't assert any jurisdiction over crimes that may have occurred wholly in Russia. In Russia, authorities have looked at some of the transactions and found no significant legal violations. [...]

Mr. Reiman is named in search warrants and requests for international judicial assistance, German prosecutors' spokeswoman Doris Moller-Scheu said. That's because prosecutors have "substantial evidence" that he participated in the initial crimes of stealing assets of the Russian companies and paying bribes to Russian officials, she said.

Commerzbank allegedly helped finance the expanding empire and conceal its true ownership, while Barclays handled many of the suspect transactions between its numerous offshore entities, according to investigators. A spokesman for Barclays in London said the bank can't comment on any law-enforcement matters.

A Commerzbank spokesman says the bank fully backs its CEO, Mr. Muller, who is one of the suspects, and it believes no current staff are guilty of illegal activity in connection with the case.

The U.S. Justice Department has begun its own investigation into the business dealings of the banks and shell companies, according to people familiar with the inquiries. It declined to comment.

The New York office of Barclays, the focus of the U.S. inquiry, acted as the middleman moving funds and converting currencies in many of the deals between firms in Cyprus and Bermuda, transaction records show. The bank acts as a "correspondent" bank for the Bermuda Commercial Bank Ltd., which handles most of Mr. Galmond's operation on Bermuda. John Deuss, chairman of Bermuda Commercial, declined to comment.

The Galmond fund in Bermuda, IPOC International Growth Fund Ltd., has been under investigation by the Bermuda government, which is looking into whether it violated regulations that require mutual funds to have many shareholders. Mr. Galmond acknowledges he is secretly the primary owner of IPOC, but the fund denies any impropriety.

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