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(This is the third story of a series, Comrade Capitalism. See here)
By Douglas Busvine, Stephen Grey, Roman Anin and Himanshu Ojha
MOSCOW, May 23 (Reuters) - In the world's biggest country, railways are still a route to riches. With nearly 1 billion passengers a year and $42 billion in annual sales, the state company Russian Railways is a giant commercial opportunity.
At its head is Vladimir Yakunin, an old friend and long-standing ally of President Vladimir Putin. He oversees a company that strikes international deals, issues bonds to major investors and plans hugely expensive new high-speed lines. By many measures, Russian Railways is a standard corporate colossus.
But a Reuters investigation has uncovered another side to the state-owned company: Under Yakunin, it has paid billions of dollars to private contractors that disguise their ultimate owners and have little or no presence at their registered headquarters.
A Reuters study of tenders held by Russian Railways also identified contracts worth hundreds of millions of dollars granted to companies that ostensibly bid as rivals but appear to be closely related.
In 43 tender competitions worth $340 million from 2010 to 2013, for instance, the same two companies were the only bidders each time. Those two firms, it turns out, were set up on the same day, by the same person acting on behalf of undisclosed owners. The firms opened accounts at the same bank on the same day, and declared an identical number of employees two years in a row. On one occasion, they filed bids for a Russian Railways tender within a minute of each other. And last October, after Reuters first inquired about the nature of the companies, both registered websites on the same day.
Russian investigator Sergei Lesnichiy said Reuters findings appeared to show an attempt to manipulate tenders for state contracts, potentially inflating costs to the detriment of Russian Railways. Lesnichiy, director of the Centre for Financial Investigations, an expert body set up by the Russian state, said such effects, if verified and if insiders at Russian Railways benefited, could amount to fraud under Russian law. But he also said that under Russian law it is not an offence for related companies to bid in state tenders.
A further Reuters analysis of banking transactions between 2007 and 2009 involving one large private contractor to Russian Railways showed patterns of activity that U.S. and Russian financial investigators said were typical warning signs of suspicious banking activity.
The analysis suggests that millions of dollars originating from Russian Railways ended up with companies that had nothing to do with railway work. Some of these companies have been judged by Russian authorities to be bogus companies with no genuine operations.
These transactions passed through a small bank part-owned from 2007 to 2009 by a businessman called Andrei Krapivin. Yakunin, the head of Russian Railways, once described Krapivin as an "old acquaintance" and an "unpaid adviser who understands banking well," according to the Russian newspaper Vedomosti.
Krapivin and several of his business associates are or have been directors of large contractors working for Russian Railways.
A spokesman for Russian Railways said Krapivin "is not an adviser" to Yakunin, but did not comment on whether he had been in the past.
This investigation is part of a Reuters series examining how Russia does business in the Putin era. Even as the Russian president has denounced corruption, some members of the elite have used secretive companies, straw owners and other means to gain business worth hundreds of millions of dollars from some of his signature undertakings. Earlier stories examined how two of Putin's associates profited from an ambitious state healthcare project.
This article, which is based in part on a confidential database of Russian bank records, focuses on one of the country's largest businesses in state hands: the railways. The money at stake is huge: In 2012 Russian Railways handed contracts worth $22.5 billion to private contractors - more than the $19.7 billion it paid its staff.
In March, after Russia annexed Crimea, Yakunin was one of the senior Russian officials and members of Putin's inner circle sanctioned by the United States. The U.S. Treasury described him as a "close confidant of Putin" who "regularly consults with Putin on issues regarding the Russian Railways company."
He has known Putin since they were both in St. Petersburg in the 1990s. Putin appointed him as head of Russian Railways in 2005, early in Putin's second term as president.
Yakunin did not respond to Reuters inquiries regarding this story, but his spokesman at Russian Railways, which is also known by the abbreviation OAO RZhD, replied to written questions.
"The procurement activity of OAO RZhD is undertaken in strict accordance with the relevant laws," Alexander Pirkov wrote. Tenders were organised in "the most transparent way" and procurement activity "has been repeatedly examined by the competent state organs, including the Audit Chamber of the Russian Federation," he said.
Russian Railways said the companies identified by Reuters were all legitimate, and that its contracts were awarded fairly and fulfilled properly.
Krapivin did not respond to Reuters requests for comment. Instead, his son called. Alexei Krapivin said his father had no involvement in the railway contractors and transactions examined in this report. He said any suggestion to the contrary was "bullshit." He declined to comment in detail.
In a leafy suburb of east Moscow stands a red-roofed town house with a children's playground in the yard. One day last summer, a group of young men in T-shirts and jeans stood around smoking.
There was more to the town house than met the eye. It was the registered headquarters of a company that has won 9 billion roubles ($270 million) in contracts from Russian Railways and its subsidiaries since 2010, and says in corporate filings that it employs more than 100 staff.
When a reporter inquired at the property, a man in his 40s - head shaven, arms tattooed - came out. Asked whether the contractor, MPCenterZhat (MPC), was based there, he sent for a younger man, whose hair was cropped at the sides and hung in a ponytail at back.
"They sit here - they have an office on the second floor - but they only come here once a week," the ponytailed man said.
MPC is one of a sample of 10 rail contractors studied by Reuters; together they have received more than $2.5 billion from Russian Railways since 2007, according to tenders and other documents reviewed for this article.
Reuters chose the firms because they bid for the same type of work, mainly the upgrading of track signalling and train control systems. They were selected from a longer list of railway contractors provided by a Russian banker now living in Britain, German Gorbuntsov, who survived an attempt to assassinate him in London's Canary Wharf district in 2012.
Before he left Russia, Gorbuntsov used to be co-owner with Krapivin of a bank called Capital Commercial Bank (known by its Russian initials STB). All the 10 rail contractors examined by Reuters had accounts at STB.
On the face of it, Russian Railways offers contracts to private companies in open tenders where market forces apply. But several people familiar with the process alleged some contractors work together to win tender competitions. This is done, they said, by companies either managing to be the only bidders, or working with other bidders to decide who should win or to inflate prices. Reuters was unable to verify those claims.
A Reuters analysis of tender competitions involving the 10 companies showed little attempt by bidders to compete for contracts on price. Out of 185 cases where the winning bid was listed, 79 were only 0.5 percent - down to the kopek - below the maximum price set by Russian Railways. A further 35 of the winning bids were 1 percent below the maximum allowed price.
The nature and activities of the 10 rail contractors were hard to pin down. The two biggest beneficiaries, by value of contracts won from Russian Railways, were MPC and a company called TransServisAvtomatika (TSA). From 2010 until the middle of 2013, these two firms were the only bidders in 43 tender competitions worth $340 million. MPC and TSA bid as rivals and at first sight appear to be separate entities.
To find out more about them, Reuters went in search of their head offices. The headquarters for MPC listed in Russia's corporate registry was the town house with the children's playground where no one from MPC was present when a reporter visited. TSA's legal headquarters was a 15-storey building just outside Moscow's ring-road. The structure contained a business centre, a car dealership, a fitness club, a beauty parlour, two bank branches, a florist and a grocery - but no sign of TSA. A security guard there found a mention of the firm on his computer, but said the company did not have an office there.
As well as their elusiveness, MPC and TSA have other striking similarities, including the fact they were set up on the same day in 2005 by the same individual and that they opened bank accounts on the same day at STB.
These overlaps were no mere coincidence, said a former manager who worked for both companies at different times in the mid 2000s. The two companies were in effect part of the same group and bid together on Russian Railways contracts to ensure the group owner had a "guarantee of winning."
MPC and TSA list two different people as managers in corporate filings; neither of them responded to repeated requests for comment.
Referring to the two companies, Yakunin's spokesman Pirkov wrote: "They are suppliers acting in good faith and are fully functioning enterprises ... Deliveries under these contracts are made on time, (and) production was of reliable quality. No evidence has been found that they acted in bad faith."
Of the 10 companies studied, only one, called Zheltransavtomatika, had a registered headquarters where Reuters found employees working. The company's manager did not respond to written questions.
Four of the 10 companies listed their offices at locations where nobody had heard of the businesses at all. These headquarters included a freight depot by a motorway, a car repair shop and an upmarket children's department store in central Moscow.
Who owns these companies? MPC is a type of entity that isn't obliged to declare its shareholders. The registered owners of the other nine contractors to Russian Railways are a motley bunch. An examination of official filings showed each firm was owned by one or two individuals - a total of 10 women and three men.
Those owners whom reporters were able to trace all lived in modest Moscow apartment complexes. In one run-down building, a person listed in official documents as sole owner of one of the contractors confirmed having been the formal owner until recently. In reality, though, this person said, they had never truly controlled the company, but had acted as a straw owner, hiding the real owners of the firm.
The straw owner knew the company's business involved contracts with Russian Railways but had no other knowledge of its operations. The straw owner alleged that the controlling influence behind that contractor was Andrei Krapivin, the man Yakunin, head of Russian Railways, once described as an unpaid adviser.
"I know Alexei Krapivin," said the straw owner, referring to Andrei Krapivin's son. The son, he said, organised business between Russian Railways and the company. The straw owner said Krapivin senior was the "main man" behind this arrangement, while his son handled the practicalities.
In his phone call, Krapivin's son, Alexei, said STB belonged to Gorbuntsov and not to his father, and said his father was not a hidden controlling influence behind rail contractors. He did not answer further questions. However, a written statement signed by Andrei Krapivin records that he was a shareholder in STB from 2007 to 2009. Public corporate records also show that he was a shareholder in 2008.
Yakunin's spokesman did not comment on whether Krapivin had any connection to any of the 10 contractors, but ruled out the possibility of any wrongdoing.
From the steam locomotives of "Doctor Zhivago" and the Russian Revolution to the double-decker express trains hurtling to the Winter Olympics, railways have helped make Russia, permeating the nation's geography and culture.
When Vladimir Lenin returned from exile to lead his revolution in April 1917, he travelled from Finland to Russia's old Tsarist capital of St. Petersburg by steam train. By the 21st century, Russian Railways was looking to upgrade the historic line to take electric trains running at 220 km per hour (140 miles per hour).
One of the biggest beneficiaries of that project was a private contractor called Setstroienergo. In total, Russian Railways awarded Setstroienergo nearly $1 billion between 2007 and 2013, according to public tender records and a database of bank transactions supplied by Gorbuntsov.
When Gorbuntsov left Russia after falling out with former business partners, including Krapivin, he brought with him a laptop. It contained, among other banking data, millions of transactions that took place through STB between the beginning of 2007 and late 2009. Money frequently moved through a whirl of accounts, making it hard for anyone such as outside auditors or tax officials to track, Gorbuntsov said.
To examine what happened to Russian Railways' funds, Reuters studied the flow of money into and out of Setstroienergo, as recorded by Gorbuntsov's database. Reuters established the authenticity of the database by verifying sample transactions with independent sources.
Between 2007 and 2009, Russian Railways paid $772 million into Setstroienergo's account at STB, according to the database. Those payments, and subsequent transactions, appear to follow the pattern described by Gorbuntsov.
For example, Russian Railways made 98 payments to Setstroienergo, worth $211 million, where the money was moved on to other bank accounts almost immediately. In each of these transactions, Setstroienergo received a sum from Russian Railways and either that day or the next working day paid out exactly the same amount to a company called StroiMontazh.
The money went into StroiMontazh's account at a bank called Industrial Credit Bank (Incred). That bank was also run by Gorbuntsov; Krapivin was not a shareholder.
It is not clear who controlled StroiMontazh and its account at Incred, or why the company received payments from Setstroienergo. StroiMontazh was liquidated in 2010, and its previous shareholders and management could not be traced. Setstroienergo declined to comment.
Gorbuntsov's database contains transactions by both Incred and STB. The database indicates that StroiMontazh rapidly transferred most of the money it received to other entities. Some went to accounts outside STB and Incred, but most moved around numerous accounts within those two banks.
In one 30-month period, starting in 2007, StroiMontazh paid a little more than a third of the funds it received to accounts outside STB and Incred. This money appeared to go to railway contractors for work such as installing new track and signalling equipment, judged by an examination of public records and interviews with local railway officials and company executives.
But nearly two-thirds of the money StroiMontazh received moved on quickly to other companies with accounts at STB or Incred. A search of corporate filings, tender records, court judgments, business directories and media reports found no reference to these companies carrying out railway work. No officials from these firms could be traced for comment.
One recipient was a company named Legatta, which banked at STB. According to its published accounts, Legatta's revenue totalled only $3,800 in the year to the end of December 2007. Yet in the same period, the bank database records the company was paid $115 million by StroiMontazh. Reuters was unable to contact Legatta.
A company called Univolt was another recipient of funds from StroiMontazh. It received $67 million between May 2007 and October 2007, according to the database. Reuters could find no accounts for Univolt and was unable to trace it. In a 2010 Moscow court case unrelated to Russian Railways, tax authorities said they had ordered the suspension of Univolt's bank account at Incred because they suspected the company carried out no genuine business.
At some companies that received money from StroiMontazh, the people registered as owners said they knew nothing about the firms they purportedly owned.
One recipient was a company called Trastkom, which banked at STB. Its listed owner, Nadezhda Korostelyova, was registered at an address in a southern suburb of Moscow. Korostelyova's daughter Vasilisa answered the door and said her mother no longer lived there. She said that many people had come to ask about her mother's companies.
"Several years ago a friend of a friend asked her to set up a company," the daughter said. That person had taken a copy of her mother's passport and asked Korostelyova to sign some forms. "Firms are still being set up in her name."
In addition to the $772 million that Setstroienergo received from Russian Railways between 2007 and 2009, the contractor also won Russian Railways' tenders worth $223 million between 2010 and 2013, according to public documents.
Setstroienergo declined to comment for this story. Public information about the company is limited. It is a "closed joint stock company," which means it does not have to disclose its owners.
Its official headquarters is a single room in a run-down business centre in a block of flats in Moscow's northwestern suburb of Tushino. When a reporter visited the address during working hours, no one was there. (Currency conversion at 1 rouble to $0.0304, the rate at the end of 2013) (Additional reporting by Gleb Stolyarov; Editing By Richard Woods and Simon Robinson)