Bank “Rossiya”

Financial Times, November 30, 2011

FT investigation: A realm fit for a tsar.

By Catherine Belton

Opaque: Vladimir Putin is alleged to have had a Black Sea palace built for him. The Russian prime minister’s office rejects this as ‘insinuations’ ahead of elections

On an autumn day in September 2010, Sergei Kolesnikov slipped out of his condominium in a row of town houses in St Petersburg. To avoid attracting attention among his neighbours, a secretive clique of financiers, he carried just a small bag. He hurried to the airport and bought tickets to Turkey and then the US.

Mr Kolesnikov had reason to be cautious. For 17 years, he had worked closely with several of these financiers as they helped transform a little-known St Petersburg-based bank – Bank Rossiya – into one of Russia’s most powerful financial empires, themselves becoming very wealthy along the way. But, disillusioned with how things had developed, Mr Kolesnikov was preparing to tell the inside story of their rise.

Documents from Mr Kolesnikov, together with a Financial Times investigation, help to lift the veil on the history of Bank Rossiya, whose shareholders include several men with close links to Vladimir Putin, Russia’s supreme leader, including the son of his cousin. Yury Kovalchuk and Niko­lai Shamalov, two of its biggest shareholders, were co-founders with Mr Putin of a lakeside dacha enclave outside St Petersburg.

These men from Russia’s second city are seen by many businessmen and bankers as the core of a new generation of Putin-era oligarchs, combining wealth with links to the country’s top leadership just as their predecessors during the Boris Yeltsin years had done. This is despite Mr Putin’s pledge nearly 12 years ago to eliminate oligarchs as a class.

Now that Mr Putin plans to return as president in elections next March, after four years as prime minister under President Dmitry Medvedev, claims of a new system of crony capitalism are under scrutiny.

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The paper trail Mr Kolesnikov has disclosed to the FT appears to show for the first time how two Bank Rossiya shareholders – Mr Shamalov and Dmitry Gorelov, a former KGB colonel – received via an offshore company funds originally donated for equipment for St Petersburg hospitals, just as they bought their bank stakes.

The documents then appear to show that these same funds and offshore companies may have helped finance the first in a string of Bank Rossiya acquisitions of financial assets from Gazprom, the state-controlled gas producer. Some investors allege the deals that followed were quasi-privatisations that helped to drain billions of dollars in value out of a gas group that had come to symbolise Russia’s commodities-fuelled resurgence. Bank Rossiya rejects this as “nonsense”, saying its growth is due to its professional management and successful strategy as a universal bank. The bank’s assets stood at Rbs274bn ($8.9bn) by October 1, up from Rbs6.7bn at the start of 2004 – a compound annual growth rate of more than 60 per cent.

Appetites in an energy boom

Mr Kolesnikov’s tale nonetheless provides a glimpse into a quiet transformation inside Mr Putin’s regime over the eight years after he cemented his hold on power. He had cowed big business with the 2003 arrest of Mikhail Khodorkovsky, the Yukos oilman, and removed the last vestige of political competition by ending regional governors’ elections in 2004.

The transfers from Gazprom that benefited Bank Rossiya highlight the subsequent lack of checks and balances over Mr Putin’s power, critics say – and the growing appetites of his inner circle amid Russia’s energy boom. Most tellingly, Mr Kolesnikov’s tale threatens to belie the austere image Mr Putin has sought to present, with Mr Shamalov – one of the Bank Rossiya shareholders Mr Kolesnikov worked with – apparently seeking to build a lavish palace for his “tsar”.

Mr Kolesnikov claims those who dealt with him initially nicknamed Mr Putin “boss”, then “tsar”. “First it was a joke but then it was serious. Only he could decide everything. A transformation was going on,” Mr Kolesnikov claims. “After the second presidential election in 2004, this understanding that he could rule forever began to appear. You understand all this with Medvedev was based on finding a way for him to remain.”

Documents Mr Kolesnikov has shown to the FT provide some support for his claims that money sent from offshore companies involved in the Bank Rossiya transactions was later transferred, through other companies, to pay for construction work on a Black Sea resort complex now claimed to have been intended as a secret palace for Mr Putin.

Mr Kolesnikov, who oversaw many of the payments as a business partner of Mr Gorelov and Mr Shamalov, and whose name is on many documents reviewed by the FT, first made claims in an open letter to Mr Medvedev late last year. He alleged at the time that Mr Putin had instructed Mr Shamalov to set aside part of the medical donation cash for investments in the economy but that other projects were dropped to focus on the Black Sea retreat. That blossomed into an Italian-style palace fitted with three helipads, a summer amphitheatre, a marina and a teahouse with swimming pools, he claimed.

Mr Putin’s spokesman and Mr Shamalov dismissed these claims, initially reported in the Washington Post. However, the links now emerging between all these transactions pose troubling questions. If Mr Shamalov controlled the money to build the palace, was he acting on Mr Putin’s behalf in the acquisition of stakes in Bank Rossiya and its expansion too?

Dmitry Peskov, Mr Putin’s spokesman, says the prime minister had no connection to any of it. “Putin never had and does not have any connection to Bank Rossiya, nor to any transactions or deals through any of the offshore companies or companies that are mentioned,” Mr Peskov says. “He has no connection to the growth of the bank I can officially say this is nonsense.” All kinds of “insinuations” are being stoked ahead of parliamentary elections on Sunday, he adds.

How Gazprom lost control of Gazprombank:

When Gazprom transferred control in 2007 of Gazprombank, its banking arm and the country’s third biggest lender, to Gazfond, the gas giant’s $6bn pension fund, the deal was seen as so incremental that the investor community barely noticed.

But Gazfond was closely linked to Bank Rossiya – which owned Lider Asset Management, the company that managed Gazfond’s assets and held most of the latter’s stake in Gazprombank as a nominee shareholder.

In a sign of the closeness of the two companies, Gazfond and Lider until recently shared the same office building and as, this correspondent found on a recent visit to the pension fund, the walls of Gazfond’s conference room bore Lider’s logo.

Bank Rossiya had used Sogaz, the former Gazprom insurance arm that was by then a subsidiary, to buy 75 per cent of Lider in August 2006 for an undisclosed sum, giving it access to Gazfond’s pot of cash. But there were already family links. Yuri Shamalov, son of Nikolai Shamalov – a Bank Rossiya shareholder – had been appointed head of Gazfond in August 2003. According to his official biography, he had no previous insurance industry experience – but he had worked with Vladimir Putin in St Petersburg’s foreign economic relations committee.

Gazprom’s board then cleared the way for Gazfond to acquire 50 per cent plus one share of Gazprombank, suddenly rejecting a previous initiative to sell 33 per cent of the bank to Gazfond for $1.3bn. Instead, directors allowed Gazfond to swap nearly 20 per cent it held of Mosenergo, a Moscow power generator, for 49.9 per cent of Gazprombank, and buy a further 0.07 per cent for $2.65m.

Gazfond then handed most of its Gazprombank holding to Lider after legislative changes barred pension funds from holding more than 10 per cent of non-traded assets. “[Gazprom] gave it away for nothing just like that,” says Vladimir Milov, a former deputy energy minister, referring to the transfer of the controlling stake in Gazprombank to Gazfond. Mr Milov has published an investigation into Gazprom’s various asset transfers, alleging the loss of billions of dollars in value from Gazprom.

Gazprom’s spokesman Sergei Kupriyanov, however, claimed the gas monopoly received full value for its bank stake. Mosenergo’s value reached $9bn in 2006, the year the transaction took place, he said. He added that allowing Gazfond to take control meant Gazprom could lower its debt burden by no longer having to consolidate Gazprombank into its accounts. “We acquired a strategic asset that we needed for a value in line with what was being offered by Dresdner Bank,” he says, referring to an earlier $800m bid by the German bank for one-third of Gazprombank. Just months after the deal, Gazprombank’s deputy chairman, Alexander Sobol, valued Gazprombank at $8bn.

Gazprom and Bank Rossiya say Lider only manages the Gazprombank stake on behalf of Gazfond, and does not have direct ownership of it. But by 2008, Gazprom had relinquished its majority on the Gazprombank board. Today, Gazfond’s Yuri Shamalov, as well as Anatoly Gavrilenko, head of Lider, are both on the board. So too is the head of Sogaz – Sergei Ivanov junior, son of deputy prime minister Sergei Ivanov, a close Putin ally and former KGB colleague.

Catherine Belton

Mr Shamalov dismisses the claims as “inventions”, declining to respond further. Mr Gorelov confirms some of the Bank Rossiya-related transactions but says he acquired his holding in the bank with legitimate profits from his medical equipment business, and is the sole beneficiary of the stake.

Mr Kolesnikov has no documentary evidence the transactions were conducted on Mr Putin’s behalf. But he points to how the same chain of offshore companies was involved in transferring funds that were subsequently channelled to companies he says were working on the palace project. As a former KGB officer, he adds, Mr Putin “was taught especially never to leave any trace. There are no such documents” with his name on.

Medical money moves around

Whatever their nature, the relationships were forged in the early 1990s when Mr Putin was St Petersburg’s deputy mayor and headed the city’s foreign economic relations committee. Mr Kovalchuk, a former scientist, had become a big stakeholder in Bank Rossiya, established in the city in 1990 to manage Communist party funds. Mr Kovalchuk declined to be interviewed.

In 1992 Mr Putin’s committee took a controlling stake in a business called Petromed along with Mr Kolesnikov, also a scientist, and Mr Gorelov, who served on the city’s health committee. Petromed’s job was to supply medical equipment to upgrade the city’s hospitals. Mr Kolesnikov says Mr Putin also recommended Mr Shamalov, then a representative of Germany’s Siemens, as a supplier of the equipment.

Bank Rossiya remained a minnow through the 1990s. But after Mr Putin took the presidency in 2000, its transformation began. First came growing business for Petromed, which, after Mr Putin left St Petersburg for a Kremlin job in 1996, had become 50-50 owned by Mr Gorelov and Mr Kolesnikov. According to Mr Kolesnikov and documents seen by the FT, the company started to win contracts for upgrades of medical equipment funded by wealthy donors.

Roman Abramovich, the tycoon who owns Chelsea football club, and his Pole of Hope charitable foundation were an early example, agreeing to donate $203m in 2001 for equipment for St Petersburg’s Military Medical Academy. Mr Abramovich’s spokesman says Pole of Hope donated only $180m in the end and payment was based on invoices from Siemens.

Petromed was to source the equipment from Siemens and General Electric of the US through a UK-domiciled company, EM&PS, co-owned by Mr Kolesnkiov, Mr Gorelov and Mr Shamalov, documents show. EM&PS declined to comment.

After the purchases, $85m remained from this and other donations, Mr Kolesnikov says. “This wasn’t kickbacks,” he insists. “We were just able to buy for lower than the price list.” Mr Gorelov says Petromed had long-term contracts with suppliers enabling it to achieve discounts of up to 50 per cent.

At this point, several offshore companies enter the narrative. One, Rollins International, was registered in the British Virgin Islands, while another, Santal Trading, was registered in Panama. According to copies of two bank transfers from February 12 2002, EM&PS transferred $85m to Rollins, and Rollins sent $50m to Santal. Mr Gorelov says the transactions were legitimate transfers of profits. Representatives of Santal and Rollins declined to comment.

Mr Kolesnikov claims Mr Gorelov and Mr Shamalov then used the cash to buy 12.6 per cent stakes in two stages in Bank Rossiya. In the months before they did so, Rollins paid them dividends totalling $22.3m for Mr Gorelov and $21.8m for Mr Shamalov, according to copies of the payments. “They bought these shares with the funds that were intended for medical equipment,” Mr Kolesnikov claims. Mr Gorelov confirms the transactions but says the funds came from legitimate business activities of Petromed, which he co-owned. Mr Shamalov declined to comment.

A power shift, then gas gains

While those transactions were taking place in 2003-05, a political shift was under way in Moscow. Yeltsin appointees left and were replaced by Mr Putin’s own men – including Mr Medvedev, who was already chairman of Gazprom, as chief of staff. As officials from St Petersburg gained more sway, the path seemed to open for Bank Rossiya’s expansion.

In particular, Gazprom ended years of resistance to selling “non-core” assets, as part of a broader restructuring. But instead of the big open-market offerings the government had debated, asset transfers took place that benefited Bank Rossiya, says Vladimir Milov, a former deputy energy minister who is now an opposition leader. “The balance changed – and a whole new powerful financial industrial group was created,” says Mr Milov, who has investigated Gazprom’s asset sales. “The transfers were suddenly agreed so quickly.”

That summer, Gazprom began selling a 76 per cent stake in Sogaz, its insurance arm. The buyers were revealed in January 2005 as three companies affiliated with Bank Rossiya. At the time, media questioned how Bank Rossiya could have funded the purchase of the bigger Sogaz. Mr Kolesnikov claims the funds came from the same offshore companies used in the earlier transactions.

One of the buyers, Aktsept, which held 4.5 per cent of Bank Rossiya, was according to company registration documents owned by Mikhail Shelomov – a grandson of Mr Putin’s maternal uncle. Aktsept received an $18m loan from Santal in September 2004, documents show, and bought 13.5 per cent of Sogaz. Mr Putin’s spokesman describes Mr Shelomov as a distant relative and says the prime minister “hardly ever sees him”.

Top shareholders in Bank Rossiya

28.57% Yury KovalchukFormer scientist and Vladimir Putin’s dacha neighbour

11.5% GazoraspredelenieGas distribution subsidiary of Gazprom

9.886% Dmitry GorelovEx-KGB colonel who co-founded Petromed

9.886% Nikolai ShamalovFormer Siemens representative alleged to be building “Putin palace”

Source: company

Another was Abros, wholly owned by Bank Rossiya, according to company documents. Copies of loan agreements show it received $41m in loans and guarantees from Santal in July and September. It bought 49.97 per cent of Sogaz, later raised to 51 per cent. Mr Gorelov and Mr Shamalov declined to comment. Bank Rossiya says it raised the funds for the purchases in the open market.

Under Bank Rossiya’s ownership Sogaz rapidly expanded, more than tripling its net profits between 2004 and 2006 as it won powerful new clients. Bank Rossiya says it bought its stake when Sogaz’s market value was $120m but declines to say how much it paid. Today, analysts estimate Sogaz is worth up to $2bn.

The Sogaz acquisition allowed Bank Rossiya to move in on an even bigger prize – Gazprombank, the country’s third-biggest lender. In a series of deals starting in August 2006, Sogaz acquired Lider Asset Management, which managed Gazfond, Gazprom’s pension arm. Gazfond then acquired control of Gazprombank in an asset swap worth up to $1.8bn with a $2.65m cash component, and handed over the bulk of its stake to Lider to manage.

Investors allege Gazprom’s handover of control of its banking arm, valued by the bank itself a few months later at $8bn and now at about $15bn, opened the way for deals that drained billions of dollars of value out of Gazprom even as Gazprombank’s profits soared. Bank Rossiya dismisses this suggestion. Gazprom says it achieved full value for its stake in Gazprombank via an asset swap, while it had no way of predicting the growth in value of other assets held in Gazprombank that were later sold. Gazprom and Bank Rossiya say Lider only manages the stake on Gazfond’s behalf and does not own it.

Ivan Mazalov, fund manager at Prosperity Capital Management, says the transfers “look like some kind of quasi-privatisation” for closely linked parties, adding: “It’s not a very competitive process, so you can have various suspicions about the valuations.”

Gazprombank boasted other big assets, including Gazprom Media, which owned the popular NTV channel and Izvestiya newspaper. Gazprom had sold the unit to Gazprombank for $166m in 2005. Two years later Mr Medvedev, as Gazprom chairman, valued the media group at $7.5bn. Mr Milov says the difference in valuations was another sign Gazprombank was undervalued when Gazprom ceded control.

Disillusion and a palace puzzle

Mr Kolesnikov says he at first welcomed Mr Putin’s rise to the presidency, believing he would restore order after the chaotic Yeltsin years. But by 2008 he understood everything had changed.

After the 2008 financial crisis hit, Mr Kolesnikov claims Mr Shamalov told him to stop financing investment projects he had been running in shipbuilding and other sectors with remaining Petromed funds, which he believed at least had distributed wealth back into the economy. Instead, he was to divert all funds towards completing the Black Sea palace. Mr Shamalov declined to comment on this.

“When they took [this] decision it turned out that I’d worked every day for 15 years for 10 hours a day to build a palace for the tsar. I am never agreeing to this,” says Mr Kolesnikov.

His documents show transfers from Rollins and Santal via Liechtenstein and Switzerland into a Russian investment company called Rosinvest. Rosinvest then made payments to another company, Lirus, named in a 2005 contract as a co-investor in a resort complex near the Black Sea village of Praskoveyevka on Russia’s south coast, together with the Kremlin’s property department. Documents also show Lirus making payments to the presidential guard service for construction work on the same numbered contract. The paper trail, however, is relatively scanty and, though it shows various payments between the companies, they do not amount to the $1bn Mr Kolesnikov alleges was spent on the palace in total.

Mr Putin’s spokesman distances his boss from the project, insisting it was owned by Mr Shamalov, who sold it to another Russian businessman this year. Mr Peskov says it is now being rented out “on a commercial basis” but will not say to whom. “I know for sure that Putin has no connection” with the palace, he adds.

Yet for Mr Kolesnikov, the rapid ramp-up in the palace’s costs symbolised the Putin regime’s swelling appetites as it tightened its grip on power. Dubbed Project South, it began in 2005 as a plan to build a more modest house or domik for Mr Putin of 1,000 square metres, he says. But by 2007, “the domik had grown into a huge palace”, expanding to more than 4,000 sq m in total.

“This whole transformation took place between 2004 and 2010. It is very dangerous for the country.”