Commentaries

The $1.2 billion fraud alleged at Russia’s largest bank

Tucked away on page 4 of the Moscow Times today there is a remarkable article which made me wonder whether I wasn’t hallucinating.

The report states matter-of-factly that several branch managers are being investigated for defrauding $1.2 billion from Sberbank, Russia’s largest bank. That’s according to comments made by Sberbank’s regional manager for Moscow. The Moscow Times translated the article from Thursday’s edition of the Russian newspaper Vedomosti, where it appears on page 7.

According to this article, Sberbank suspects managers at three Moscow branches of doling out “thieving” loans, on the basis of “fictitious” documents, to “dubious” companies. The scale of the resulting losses at these three branches? “More than 35 billion roubles” ($1.2 billion).

When you include similar goings-on at other branches, the total figure for Sberbank’s “dubious” loans appears to be even higher still: 46.1 billion roubles, or some $1.6 billion. That it is more than double Sberbank’s total profits for last year.

This isn’t the first time that I have seen reports about fishy goings-on at the Sberbank. The fraud allegations first trickled out last summer (back then the allegations concerned just a single branch, and the figure for the losses was a mere $180 million). The news attracted so little attention it was hard to know what to make of it.

Welcome to the often surreal nature of modern Russia. The muted reaction brings to mind several other major fraud scandals over recent months that have been treated in an equally off-hand fashion.

Last April, for instance, a Moscow court convicted a certain Viktor Markelov for stealing 5.4 billion roubles ($180 million) from the Russian budget. Yet it wasn’t until December – seven months after Markelov’s conviction – that Russia’s state news agency RIA-Novosti reported on the case. It wouldn’t have attracted any attention at all, but for the scandalous death in prison in November of Sergei Magnitsky, a lawyer for the hedge fund Hermitage Capital, who had accused several police officers of complicity in the fraud.

Russia’s shocking corruption belies Medvedev’s tough rhetoric

Everyone knows that Russia is corrupt, but did you know just how corrupt? The short answer is: more than any other country. That, at least, is the conclusion of a survey just published by PricewaterhouseCoopers, which examines the level of economic crime around the world.

PwC canvassed more than 3,000 companies in 55 countries, 89 of them in Russia. It asked them if they had been the victim of frauds such as embezzlement, bribery and crooked accounting. Russia topped the list, with 71% of respondents reporting at least one instance of fraud during the previous twelve months.

The PwC report makes alarming reading for potential investors. The extent of fraud in Russia is even worse than in Kenya (67%) or South Africa (62%), the next countries down the list. Russia’s score was also far above the global average (30%), as well as the averages for Central and Eastern Europe (34%) and BRIC countries (34%). What’s more, there has been a “shocking” rise in the prevelance of fraud in Russia since the last PwC survey in 2007. 

Death of lawyer raises new questions in Russian scandal

You might think that the scandal involving Hermitage Capital in Russia couldn’t get any more perturbing. If you have been following the case, you’ll be aware that the British investment fund, managed by American-born financier William Browder, has repeatedly accused Russian criminals and corrupt officials of stealing $230 million in funds from the Russian budget.

Now there are more serious questions for the Russian authorities. Today the Russian Interior Ministry revealed that Sergei Magnitsky, a lawyer acting for Hermitage who was arrested a year ago, has died in prison at the age of 37. They say that he died from “toxic shock and a heart attack”.

Over recent weeks Hermitage has complained that Magnitsky was kept in inhumane conditions and denied medical treatment despite deteriorating health. A copy of an official complaint by Magnitsky, submitted in September, was published by Hermitage immediately after his death. The Interior Ministry, however, stated today that Magnitsky had never complained about his health.

The news of Magnitsky’s death is a personal shock, because I met with him just a few weeks before his arrest last year. I was working on a Business Week story about suspicious financial dealings at two Russian companies, which had extraordinary similarities with the case publicized by Hermitage. Magnitsky was helpful but declined to comment for my story, citing fears for his personal safety.

Russia’s long political calm is coming to an end

Something quite extraordinary is happening in Russia. Slowly but surely, the monolithic political system that has held together in Russia for most of the past decade is coming apart

Today, in an unprecedented step, deputies from all three of the opposition parties in the Russian parliament staged a walk-out, demanding a meeting with Russian President Dmitry Medvedev. They are protesting against the results of local elections that were held in various parts of Russia on 11 October. Not for the first time, the pro-government United Russia party largely swept the board, amid widespread allegations by the opposition of vote-rigging. (more…)

A new twist in a Russian scandal

The Russian Interior Ministry is about to seek the arrest of William Browder, the chief executive of Hermitage Capital Management, for illegally evading taxes. That’s according to a front-page article in the Russian newspaper Kommersant, a leading political-economic daily.

Browder, a British and US citizen who resides in London, has been denied entry into Russia ever since 2005, when his visa was annulled for obscure reasons. His Hermitage Fund, managed by the British bank HSBC, was once the largest portfolio investor in Russia, but has more recently been embroiled in a series of interconnected scandals.

Today’s newspaper article, based on anonymous sources within the Russian police, is evidently the latest shot in a long-running media war that has pitched Hermitage against elements of the Russian police. Over the last year and a half, the British investment fund has made a series of sensational allegations, claiming that senior Russian police officers were involved in a corruption scam designed to fleece the Russian budget of hundreds of millions of dollars.

Following these claims, Russian authorities have been busy upping the pressure against the Fund. A lawyer working for Hermitage in Russia, Sergei Magnitsky, was arrested last November, and his trial in Moscow is due to begin shortly. Today’s Kommersant article lays out the case that the police intend to bring against Magnitsky, which relates to alleged underpayment of taxes by two Hermitage subsidiaries several years ago.

According to the sources cited in the newspaper, Browder is also implicated, and investigators now intend to approach Interpol with a request to place him on the international wanted list. The paper quotes Hermitage’s view that the case is fabricated “to discredit Hermitage Capital”.

Given the circumstances, the latest allegations against Browder will command little credibility outside Russia. According to court documents recently submitted by Hermitage in the US, the criminal case against Magnitsky was initiated by the same police officers previously accused by Hermitage.

If Russia does request Browder’s arrest and extradition, legal authorities in Britain are also likely to consider the findings of a recent report into the case by the Parliamentary Assembly of the Council of Europe, which slams Russia’s criminal justice system. The report states that Hermitage was “the victim of the corruption and collusion of senior police officials and organised criminals.”

Third person spells trouble in politicians

Beware of politicians who speak about themselves in the third person. It doesn’t necessarily mean they are paranoid. But it is usually an indicator of some kind of trouble.

More than a decade before he was forced out of the White House for lying, destroying evidence, bugging his political opponents and covering up a crime in the Watergate affair, Richard Nixon (right) famously told journalists at what he said was his last press conference: “You won’t have Nixon to kick around any more.”

Now Italian Prime Minister Silvio Berlusconi (left) has taken to referring to himself in the third person as the victim of left-wing judges and the media (at least the parts of it that he doesn’t own or control). His response to the Italian Constitutional Court’s ruling on Wednesday overturning a law that granted the prime minister immunity from prosecution during his term in office was to declare:

Without Silvio, the country would be in the hands of the left and you all know what would happen. The trials that they are going to throw against me are a farce. Long live Italy! Long live Berlusconi! 

What do the two have in common? Clearly a belief that they are victims of persecution, and perhaps also a sense that power exists to be used implacably against enemies.

Berlusconi, a billionaire media magnate and soccer club owner, also has a lot in common with Bernard Tapie, a self-made French businessman who owned Olympique Marseille when they beat Berlusconi’s AC Milan to become European champions in 1993. Tapie was briefly made a minister under Socialist President Francois Mitterrand before being sent to prison for fraud and match-fixing. He too talked of himself frequently in the third person, making comments such as “They want to destroy Tapie”.

In some cases, politicians may be indicating a loss of reality by referring to themselves in the third person. In his final months as president of the crumbling Soviet Union, as power ebbed from his office, Mikhail Gorbachev took to calling himself “Gorbachev” in interviews and speeches. Although he enjoyed international acclaim for loosening Moscow’s iron grip on eastern Europe and Soviet society, he too came to feel that he was a victim of enemies both among hardline Communists and nationalists who wanted to destroy him politically.

West raises stakes over Iran nuclear programme

President Obama and the leaders of France and Britain have deliberately raised the stakes in the confrontation over Iran’s nuclear programme by dramatising the disclosure that it is building a second uranium enrichment plant. Their shoulder-to-shoulder statements of resolve, less than a week before Iran opens talks with six major powers in Geneva, raised more questions than they answer.

It turns out that the United States has known for a long time (how long?) that Iran had been building the still incomplete plant near Qom. Did it share that intelligence with the U.N. nuclear watchdog, and if not, why not? Why did it wait until now, in the middle of a G20 summit in Pittsburgh, to make the announcement — after Iran had notified the International Atomic Energy Authority of the plant’s existence on Monday, after Iranian President Mahmoud Ahmadinejad had delivered a defiant speech to the U.N. General Assembly on Wednesday and after the Security Council had adopted a unanimous resolution calling for an end to the spread of nuclear weapons on Thursday?

Is this all part of Obama’s choreography to  build international pressure on Iran by getting Russia, in return for the dropping of plans to put a U.S. missile shield in Poland the Czech Republic, to threaten more sanctions against Tehran? A U.S. official says Obama shared the intelligence with Russian President Dimitry Medvedev at the United Nations this week and China had only just been informed. Did Obama try and fail to get Medvedev and Chinese President Hu Jintao — both in Pittsburgh — to join the three Western leaders on the podium? Or was his hand forced on timing by the fact that the New York Times had got wind of the Iranian nuclear plant and was set to publish the news on Friday?

The division of labour between Obama, Sarkozy and Brown was striking. The U.S. president sounded stern but his tone was measured. He stressed his commitment to dialogue and negotiation with Iran and to Tehran’s right to peaceful nuclear energy. He did not mention sanctions, let alone the possibility of military action. It fell to the Europeans to inject a tone of menace.

Sarkozy accused Iran of defying the international community and taking the world on a dangerous path, and said that unless Tehran changed course by December, there would be tougher sanctions. Brown charged the Islamic Republic with deception and said the international community had no choice but “to draw a line in the sand”, and that he did not rule out anything although sanctions were the preferred route. 

Will the latest disclosure on what Iran insists is a peaceful nuclear programme persuade Russia to renounce the sale of advanced S-300 anti-aircraft missiles to Tehran? Will it persuade China, which reaffirmed its scepticism about more sanctions this week and has begun supplying gasoline to Iran, to change its mind? The West sees Iran’s dependency on imported fuel as a key vulnerability.

Friday’s dramatic announcement was a clear effort to appeal to the world court of public opinion and maximise pressure on Tehran before the Oct. 1 talks, but there is no sign that the Islamic Republic’s leaders are even considering yielding on their nuclear ambitions. On the contrary, they seem convinced that the nuclear standoff will enable them to patch over deep internal divisions over the disputed June presidential election by playing the patriotic card.

Why Russia needs America

In the wake of President Obama’s decision to scrap the U.S. missile defence shield in eastern Europe, many are pondering Russia’s response. The relationship will remain in the spotlight this week, when President Medvedev heads to the U.S. for the G20 summit. Although the precise nature of Russia’s reaction remains to be seen, it has a big incentive to improve relations. It badly needs American investment and co-operation to help solve serious economic problems at home.

Critics of Obama’s decision worry that it will “embolden” Russia, causing more aggressive behaviour abroad. Yet they forget that the Bush administration’s antagonistic policies failed to provide security to Russia’s neighbours. These policies didn’t prevent Russia’s war with Georgia, the repeated gas disputes with Ukraine, and a serious cooling of relations with countries such as Poland. Far from being restrained, Russia’s confrontational attitude had a lot to do with its perception that the U.S. was busy encircling the country with missile bases and alliances.

The critics also imply that Russia is preoccupied with external expansion, but that hardly seems appropriate today. Russia’s GDP is set to plummet by 8 percent this year. Russian analysts estimate that the country needs up to $2 trillion to renovate its dangerously clapped-out infrastructure. In major industrial cities, Russia’s dilapidated factories are mulling huge job losses. For the foreseeable future, Russia’s leaders are likely to be preoccupied with thorny domestic problems. (more…)

Shelved missile shield tests NATO unity

After just six weeks as NATO secretary-general, Anders Fogh Rasmussen has his first crisis. The alliance may be slowly bleeding in an intractable war in Afghanistan, but the immediate cause is the U.S. administration’s decision to shelve a planned missile shield due to have been built in Poland and the Czech Republic.

The shield, energetically promoted by former President George W. Bush, was designed to intercept a small number of missiles fired by Iran or some other ”rogue state”. But Russia saw it as a threat to its own nuclear deterrent and NATO’s new east European members saw it as a useful deterrent against Russian bullying, by putting U.S. strategic assets on their soil.

President Barack Obama’s decision to drop plans to install it on Polish and Czech territory leaves those former Soviet satellites feeling betrayed — because they expended political capital to win parliamentary support — and more exposed to a resurgent Russia, especially after its use of force against Georgia last year.

Obama’s move is clearly part of a warming of U.S. relations with Moscow from which Washington hopes to gain help in return on supply routes to Afghanistan, pressure on Iran to rein in its nuclear programme, and an agreement on radical cuts in nuclear arsenals. But this “reset” of U.S.-Russian relations has only exacerbated the rift within NATO over Russia.

The three Baltic states and Poland were particularly critical of NATO’s low-key response to Moscow’s military action in Georgia. Some said the refusal of west European allies led by Germany and France to agree at a NATO summit last year to putting Georgia and Ukraine on a path to NATO membership emboldened the Kremlin to act. President Dimitry Medvedev’s harsh attack on Ukraine’s leader in an open letter last month fanned their fears of Russian bullying of its neighbours.

East European officials cite Moscow’s playing with the gas taps and trade disputes, and its apparent determination to keep its Black Sea fleet in the Crimean port of Odessa Sevastopol beyond a 2017 deadline agreed with Ukraine as part of a strategy of tension intended to reverse the “colour revolutions” in Kiev and Tbilisi, and bring other former Soviet republics to heel.

All that makes it a particularly awkward moment for Rasmussen to deliver his inaugural keynote speech on NATO-Russia relations on Friday in Brussels. The former Danish prime minister has put a few noses out of joint in his first weeks by making clear he intends to run NATO in a more results-oriented way, leaving less room and time for ambassadors in the North Atlantic Council to debate any idea to a standstill. He has set strict time-limits on council meetings, streamlined flabby agendas and outsourced the drafting of a new Strategic Concept to a group of 12 experts led by former U.S. Secretary of State Madeleine Albright, on which not all allies are represented.

Obama playing a weak hand with Iran

The announcement that the major powers, including the United States, are going to open talks with Iran on Oct. 1 ought to be a source of rejoicing. After all, isn’t this what much of the world has been urging for several years, while the European Union conducted a frustrating, low-key dialogue like the warm-up band at a rock concert?

So why is there so little excitement about the United States, Russia, China, Britain, France and Germany sitting down at the table for comprehensive talks with the Islamic Republic?

Well, it’s partly because the idea of talking to Tehran has been tarnished by the deaths, mass arrests and mass trials that followed Iran’s disputed presidential election in June. No one in the West is keen to confer legitimacy on President Mahmoud Ahmadinejad or Supreme Leader Ayatollah Ali Khamenei, who sanctioned the crackdown on his opponents. As French President Nicolas Sarkozy put it last month, the Iranian leaders who told you the election was straight are the same ones telling you that Iran’s nuclear programme is purely peaceful.  

Another reason is that the West has made all the concessions to get Iran to the table. It has dropped a long-standing demand that Tehran freeze the enrichment of nuclear fuel, which Western countries believe is intended to develop a weapons capability. That means Iran’s centrifuges will continue spinning at full speed while it spins out the talks in slow motion. And Iran has taunted Western governments by trumpeting that it is not prepared to negotiate at all on its inalienable right to nuclear technology.

Furthermore, by setting the meeting for Oct. 1, Iran has removed the risk of action at the annual United Nations General Assembly session this month to press ahead with tough sanctions against it. Instead, Ahmadinejad will be able to grandstand in New York, giving diplomatic “high fives” to other radical anti-Western leaders from around the developing world while Obama makes his first address as president to the world forum.

Obama is playing a weak hand because the United States is bogged down militarily in Afghanistan and Iraq, while Russia and China are holding back agreement for further sanctions. His main joker is a double-edged sword — the fear of an Israeli military strike on Iran’s nuclear programme. He needs to juggle Israel’s impatience and its suspicion of what it sees as Western weakness with the need to convince Iran it faces a credible military option.

Russian President Dimitry Medvedev made a contribution to putting pressure on Tehran on Tuesday by saying Moscow did not rule out further sanctions. But Iran must be feeling it can play the diplomatic process to bolster the government’s international – and thus domestic – standing while advancing towards the point when it has a so-called break-out option. That is the technical capability to make a crude nuclear device within a short period if it so chooses, without actually building or testing a bomb.