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  1. Billion-dollar medical project helped fund “Putin’s palace” on the Black Sea

    THE LEADER: President Vladimir Putin, here in the Kremlin in late March, stabilised Russia’s economy and re-established its regional power. But corruption remains widespread. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

    Two associates of President Vladimir Putin profited from a state scheme to buy expensive medical equipment - and sent money to Swiss bank accounts linked to a property known as “Putin’s palace”

    MOSCOW - In 2005, President Vladimir Putin personally ordered up a vast programme to improve Russia’s poor healthcare facilities. Five years later, authorities found that suppliers were charging some hospitals two or even three times too much for vital gear such as high-tech medical scanners.

    Dmitry Medvedev, serving as Putin’s hand-picked successor at the time, went on national television to denounce the alleged scam. The perpetrators, he said, had engaged in “absolutely cynical, loutish theft of state money.” Medvedev instructed Russia’s top law enforcement agencies to make sure that “everyone who participated in this is seriously and sternly punished.”

    Suspects were rounded up in far-flung places, and in 2012 the police ministry said 104 people had been charged in connection with overpriced scanners. Several local officials and business executives were convicted of fraud and sent to prison.

    But a Reuters investigation has found that two wealthy associates of Putin engaged in the same profiteering and suffered no penalty.

    They sold medical equipment for at least $195 million to Russia and sent a total of $84 million in proceeds to Swiss bank accounts, according to bank records reviewed by Reuters. The records also indicate that at least 35 million euros ($48 million) from those accounts were funnelled to a company that then helped construct a luxury property near the Black Sea known as “Putin’s palace” - a nickname earned after a businessman alleged that the estate was built for Putin. The Russian leader has denied any connection to the property.

    These findings are part of a Reuters investigation into how associates of the Kremlin profit from state contracts in the Putin era. This and a later article examine what became of the president’s grand hospital undertaking. Another story, drawing on a confidential database of Russian bank records, will explore billions of dollars in spending on state railway contracts.

    The wealth of Putin’s comrades has come under global scrutiny amid sanctions imposed by the United States and Europe on the president’s associates over the crisis in Ukraine.

    Russia has been renowned for graft since the Soviet Union fell a generation ago. Under the first post-Soviet leader, Boris Yeltsin, “oligarchs” gained control of state-owned industries and grew fabulously wealthy. Those wild days are long over.

    Yeltsin’s successor, Putin, has restored much of the nation’s most lucrative industries, such as oil and gas, to state control. Many citizens feel Putin’s Russia is a vast improvement from the chaos of the Yeltsin era. Putin, a former KGB officer, has brought order. Rising oil prices have driven growth. Russia’s economy has more than doubled on his watch, measured by income per head.

    But corruption remains a deep-seated problem. The path to wealth today, say independent economists, lies not in seizing government assets but in tapping the vast flow of business the state does with the private sector.

    “The current system in Russia is based not on corruption in the traditional sense, but on a complete merger of public service and private business interests,” said economist Vladislav Inozemtsev, director of the Institute for Post-Industrial Studies, a think tank in Moscow.

    One reason the well-connected can game the state contracting system: In Russia, doing so may be perfectly legal.

    Lax rules, poorly enforced, make it possible for state entities to give contracts to companies that do not disclose their owners or have no presence at their registered address. Russian legislation doesn’t expressly forbid collusion or ownership affiliations between competitors in public tenders. It is in this grey zone, more so than in outright theft, that graft flourishes in Putin’s Russia.

    Faced with widespread suspicion that sleaze remains rampant, Putin has responded by declaring war on corruption. In November, he said: “We will tear out this infection from its roots.” In December, he ordered the creation of a “counter-corruption directorate,” according to a Kremlin announcement.

    Opponents of Putin have been levelling charges of cronyism and favouritism against him for years. What they haven’t done is detail how the president’s associates actually extract money from the government.

    Money Flows to the Black Sea

    In the hospital project, significant sums ended up in the hands of intermediaries with links to Putin: profits that could have provided additional facilities or badly needed services in Russia.

    The two associates of Putin who supplied medical equipment acted as middlemen in deals with the Russian state worth at least $195 million. They made profits by buying high-tech medical equipment through a British company they controlled and selling it on to Russia at much higher prices - sometimes double the market rate.

    Much of the equipment came from the German multinational Siemens AG. Siemens sold its products to the British company, which then sold the equipment on to Russia – and some of those imports fetched prices at or above those described by Medvedev as “cynical, loutish theft.”

    A GRAND PROJECT

    PROJECT HEALTH: Putin visits a new heart hospital in Penza in 2008. The hospital was part of Moscow’s push to spend more on health and education. REUTERS/Sergei Karpukhin

    Healthcare, Putin himself has said, is one of the most pressing issues facing post-Soviet Russia.

    Life expectancy at birth plunged after the fall of the Soviet Union, hitting 65 in 2002 – down from 69 in 1989. Though it recovered to 69 in 2011, according to World Bank figures, it remains well below Western nations such as Britain and the United States, where life expectancies were 81 and 79 that year. Since Putin came to power, Russia’s population has declined to 143 million from 147 million.

    Putin saw the need for improvements. In 2005, then in his second term as president, he initiated plans to spend $1 billion to build and equip 15 high-tech hospitals across Russia. His National Project Health was one of several efforts he said were vital to lift the quality of life for ordinary Russians. New clinics for emergency, heart and prosthetic patients were planned from Vladivostok in the east to Kaliningrad on the Baltic.

    “It is a guarantee against the sloppy eating up of resources without any discernible results,” Putin said.

    What Putin did not announce was that two of his associates became involved in constructing and equipping some of the hospitals.

    One was a former dentist called Nikolai Shamalov, a well-built, strong-willed man now in his sixties. He knew Putin from their days in St. Petersburg, where the future president was a powerful city official. One of Shamalov’s sons worked for Putin’s department in the city’s administration.

    Shamalov and Putin were also among a small group of men who founded an exclusive lakeside development of dachas north of the city known as the Ozero Cooperative. Shamalov grew rich through a stake in Bank Rossiya, a St. Petersburg company that expanded rapidly after Putin moved to Moscow and became president in 2000. He also worked as a top Russian sales executive for Siemens - a major producer of medical equipment.

    The other associate in the hospital project was Dmitry Gorelov, who graduated from a military medical academy in 1973. Gorelov, described by one associate as a thoughtful man who is keen on photography, was also a shareholder in Bank Rossiya until June 2013. In 2000, Gorelov was granted the title of “honoured healthcare practitioner of the Russian Federation” in a presidential decree issued by Putin.

    A third key figure in the tale of the hospital deals and the Black Sea estate is Sergei Kolesnikov, a former business associate of Shamalov and Gorelov. A biologist by training, Kolesnikov said he helped Shamalov manage an investment company; he was also a shareholder with Gorelov in a healthcare company. His roles, he said, gave him deep insight into the two men’s association with the president as well as knowledge of the hospital and Black Sea deals.

    For instance, Kolesnikov said, the two were guests at the leader’s 55th birthday party in 2007. “They were at his birthday; they told me about it,” Kolesnikov said in an interview in Estonia, where he now lives. He said Shamalov and Gorelov were also guests at parties held at Valdai, a secluded presidential residence between Moscow and St. Petersburg.

    Independently of Kolesnikov, flight details seen by Reuters may underscore the proximity of Shamalov and Gorelov to Putin.

    In 2008, the two businessmen travelled on a small private plane from Prague to the Russian resort of Sochi with Alina Kabayeva, a former Olympic gymnast described by some Russian media as having been Putin’s girlfriend. At the time the president, who was then still married, denied he had a relationship with Kabayeva and told journalists to keep their “snotty noses” out of his private life. Kabayeva declined to comment.

    Also on the plane, according to the flight information, was Vladimir Kozhin, a senior Kremlin official who was sanctioned by the U.S. Treasury in March. Asked about the flight, Kozhin said he would not respond to speculation.

    In 2010 Kolesnikov wrote an open letter to then-President Medvedev, claiming that Shamalov was building a luxury estate for Putin by the Black Sea. Kolesnikov said in his letter that he didn’t have a direct role in managing the palace project. The operation, he said, was run by Shamalov, but it drained funds from other projects that Kolesnikov oversaw. The letter said Kolesnikov knew about the project’s costs because of “detailed reports and budgets” he reviewed during his work with Shamalov.

    Shamalov did not respond to questions for this article. Gorelov, asked about his role in companies involved in Putin’s healthcare project, told Reuters: “The achievements of modern medicine until recently were accessible only for inhabitants of the largest megalopolises of Russia, mainly Moscow and St. Petersburg. The aim of the project was to provide an opportunity for inhabitants of other regions of the country, in particular Siberia and the Far East, to receive highly specialised treatment with the use of the latest advances of medical sciences.”

    A spokesman for Putin did not respond to questions about Kolesnikov’s claims. The Kremlin has previously dismissed Kolesnikov as an aggrieved man, saying he left Russia because of business disputes. Kolesnikov said he left Russia because he “decided to do something for my country” by speaking out about corruption.

    Russian graft rife and multi-faceted, says exile

    ECONOMIST: Former Russian government adviser Sergei Guriev, now an economist in Paris, reflects on the changing face of corruption in Putin’s Russia and how ordinary Russians are affected by it. REUTERS/Christian Hartmann

    THE MIDDLEMEN

    Gorelov was well placed to arrange a deal to equip Putin’s health project. He was a co-founder of a St. Petersburg company called Petromed that was set up in the early 1990s to provide medical equipment for the region. Among the providers of seed capital was the city’s external affairs committee - which was then run by Putin.

    Kolesnikov became a shareholder in the company with Gorelov, and the two remain shareholders, corporate filings show.

    Shamalov, meanwhile, was regional head of sales for the medical equipment division of Siemens, which supplied high-tech systems, such as scanners. He had worked for the company since the 1990s, according to former colleagues.

    Asked about Shamalov, a spokesman for Siemens said he left the company “effective October 1st in 2008.”

    Between 2006 and 2008, the Russian federal agency Technointorg, which was general contractor for the national health project, granted Petromed the right to supply equipment to 14 of Putin’s new hospitals. After Technointorg ran into problems, Petromed ended up supplying only eight completed hospitals.

    GATHERING: Businessman Sergei Kolesnikov (far right) says two associates of Putin, Nikolai Shamalov and Dmitry Gorelov (centre left and centre right), used profits from state projects to help build a mansion later dubbed “Putin’s palace.” Kolesnikov verified the people in this photo, which appeared on a Russian website. Reuters is unable to independently verify the location, source or date of the image.

    It is not clear exactly how much the state paid Petromed in total. But court documents show the company was awarded $120 million in relation to five of the hospitals. And records from a person in the Russian Customs Service indicate Petromed imported more than $205 million worth of medical equipment in 391 consignments from 2005 to 2010.

    The data shows most of this equipment, by value, came from Germany (65 percent) and the United States (25 percent). Siemens, which has production facilities in the United States as well as Germany, was the biggest supplier. It sent goods that included computerised X-ray machines and medical scanners.

    INDIRECT ROUTE

    The equipment was delivered straight from Siemens to Petromed, the importer acting on behalf of the Russian state. But payment did not go straight from Petromed to Siemens.

    Instead, the money took a more circuitous route, involving a second intermediary - one controlled by Shamalov and Gorelov, according to Kolesnikov.

    According to the customs data, Petromed paid $195 million to a British company called Greathill Ltd. Greathill acted as an intermediary in buying equipment from Siemens and other suppliers.

    The arrangement worked like this: The Russian state paid Petromed to supply medical equipment. Meanwhile, Greathill bought equipment from Siemens and other suppliers, according to Kolesnikov. In turn, Petromed bought the equipment from Greathill at much higher prices, up to double the going rate, according to customs documents. Bank records seen by Reuters support that account.

    Kolesnikov said he helped set up Greathill on behalf of Shamalov and Gorelov. A trail of documents reviewed for this article suggests that Greathill was an equipment supplier only on paper. According to Kolesnikov, Greathill’s real function was to act as an intermediary “where profits could be made.”

    Gorelov said it was normal practice to use such a company for big projects and that it had a “highly positive effect for the realisation of the project.” He said Greathill’s business was “absolutely transparent.”

    Corporate documents list Greathill as having a headquarters office in the town of Rochdale in northern England. At the address is a firm of accountants. The firm said Greathill was a client for which it provides a registered office. A spokeswoman for the accountants said she knew nothing more about Greathill’s business.

    Greathill doesn’t disclose who really runs and owns the company. It uses so-called nominee directors - people appointed by shareholders to represent their interests on a corporate board - from another firm of accountants in the southern English county of Essex. And it lists companies managed by the same firm of accountants as its shareholders.

    A manager at the Essex accounting firm confirmed to Reuters that it administered Greathill. He said the companies listed as Greathill’s shareholders were, most likely, nominees - in other words, entities acting on behalf of others. “A nominee company is just acting as a front,” he said. “So they are holding shares on behalf of a third party. But they are not the legal owners of the shares.”

    According to Kolesnikov and documents reviewed by Reuters, Greathill was owned by Shamalov and Gorelov.

    Copies of agreements seen by Reuters indicate that Shamalov and Gorelov each hired a Swiss trust company called Interis to acquire stakes in Greathill on their behalf – 50 percent each. Interis and Shamalov declined to comment.

    A spokesman for Siemens said the German manufacturer was unaware of Shamalov having any involvement in Greathill.

    “The company Greathill was a business partner of Siemens Healthcare until 2010. Siemens has no information to the effect that a Siemens employee was invested either in Greathill or Petromed,” the spokesman said.

    Evidence that Greathill sold Siemens products to Petromed at large mark-ups appears in customs records reviewed by Reuters.

    They show that between September 2007 and August 2008, Greathill acquired at least four Siemens Somatom Sensation 64 CT scanners. Greathill then sold the machines to Petromed for 1.9 million euros to 2 million euros each, which customs documents recorded as the equivalent of $2.7 million to $3 million at the prevailing exchange rates.

    The prices are nearly double the typical price charged by suppliers for CT scanners in the same technological class, including those made by Siemens, according to a 2010 investigation by the Kremlin into sales of medical equipment.

    Several people involved in the sale of medical gear in Germany told Reuters that hospitals in Germany and elsewhere could buy the same Siemens scanners in 2007-2008 for between 1 million and 1.2 million euros, depending on the extras included.

    NEW BUILD: In 2010, Kolesnikov claimed that a luxurious estate near the Black Sea was for Putin. A Russian website published pictures, including the one above, which it said were of the mansion. The Kremlin denied Putin had anything to do with the building. Reuters is unable to independently verify the authenticity, content, location, source or date of this photograph.

    Customs records also show that Greathill sold Petromed a Siemens Avanto MRI scanner for more than 3 million euros, which the records say was the equivalent of 130 million roubles. Greathill sold Petromed another seven of the machines, all for more than 2.6 million euros each. German experts said the typical price of such equipment was 1.2 million to 1.7 million euros apiece.

    “One hundred and thirty million roubles is a clearly inflated price,” said Alexei Popov, a Russian surgeon who has researched the pricing of medical scanners. “The approximate price for this is up to 80 million to 85 million roubles – that’s with all the bells and whistles.”

    Petromed made no comment on the deals. Its general director, Enver Useinov, said he had only been in his post a year and knew nothing of Greathill. “I can’t say anything,” he said. “I don’t know.”

    In a written response to Reuters, Gorelov said Petromed had secured equipment at competitive prices, and that those supplies and prices were approved by government experts.

    TO RUSSIA, WITH MONEY

    Not far from the Black Sea coast of southern Russia stands an imposing property, built in neo-classical style with formal gardens. The sprawling estate, near the resort of Gelendzhik, looks fit for a tsar and includes a theatre and helicopter landing pad. This is the property popularly known as “Putin’s palace.”

    How did money from Putin’s project to buy scanners for Russian hospitals end up in a property that has nothing to do with medical care?

    There were three key steps. First, Petromed paid money to Greathill. Then, Greathill sent at least $56 million to the Swiss bank accounts of a Belize company. Finally, the Belize company sent funds to a firm registered in Washington, DC.

    That firm, Medea Investment, received at least $48 million for supplying building materials for the “Putin palace” property. According to Kolesnikov, Medea’s owner was an Italian architect, Lanfranco Cirillo, who designed the building. (For details on how Reuters traced the money trail, see related story below.)

    THE FALLOUT

    Through his spokesman, Putin has denied having any connection to the Black Sea property. Far from enjoying a luxurious mansion, he has limited wealth, according to an official report of his assets.

    In December 2011, an official statement of his income showed that he had earned 17.73 million roubles ($539,000) in four years – an average of $135,000 a year. He owned only one home, a modest apartment, according to the statement.

    That same year, following Medvedev’s orders to punish people responsible for overpricing medical scanners, Russia’s prosecutor general said 68 criminal cases had been launched in 45 regions of the country.

    In the Volga River city of Ulyanovsk, for example, the regional health minister, two businessmen and a senior doctor were prosecuted in a case concerning the purchase of a Siemens Emotion 6 scanner in 2008. The minister was sentenced to 8.5 years in prison. The businessmen got seven years. The doctor received a suspended sentence of three years.

    The price paid for the scanner was 44 million roubles (equal to $1.7 million at the time). The court’s ruling, signed by the judge, described this price as “deliberately inflated.”

    Even so, it was a bargain compared to what the president’s associates charged.

    According to customs records, Greathill reaped 61 percent more - 71 million roubles - for selling Petromed the very same model.

    (Additional reporting by Elizabeth Piper, Maria Tsvetkova in Moscow, Brian Grow in Atlanta, and Jens Hack in Munich. Editing by Richard Woods and Simon Robinson.)

    Unless otherwise indicated, currency conversions at $0.0304 per rouble, and $1.374 per euro, the rates at the end of 2013

    Next, Part 2: When Putin ordered up new hospitals, his associates botched the operation

    GRAND DESIGNS: One of the pictures described by a Russian website as showing the mansion dubbed “Putin’s palace.” The Kremlin has denied Putin has anything to do with the building. Reuters is unable to independently verify the authenticity, content, location, source or date of this photograph.

    In 2010, a St. Petersburg businessman called Sergei Kolesnikov published an open letter to Dmitry Medvedev, who was then president of Russia while Vladimir Putin held the post of prime minister. Among other things, Kolesnikov claimed that a luxurious estate was being built near the Black Sea for the benefit of Putin.

    This extravagant Italianate mansion had a helicopter landing pad, summer theatre and underground tunnels. Located near Gelendzhik, close to the Black Sea coast, the mansion was quickly dubbed “Putin’s palace” and covered by Russian and international media. The Kremlin denied Putin had any connection to it.

    But curiosity persisted. Kolesnikov’s claims sparked interest partly because he was a former business associate of Nikolai Shamalov and Dmitry Gorelov, two businessmen with links to Putin. Shamalov is, and Gorelov was until last year, a shareholder in Bank Rossiya, a bank whose shareholders “include members of Putin’s inner circle,” according to the U.S. Treasury. The two men were guests at Putin’s 55th birthday party, according to Kolesnikov.

    The company that originally oversaw the building of the estate was called Rirus. According to a document previously published by Kolesnikov, the founders of Rirus were Shamalov and Gorelov. Rirus shared the same address as other companies in which the two men had stakes.

    In 2011 the Russian newspaper Vedomosti, citing official corporate records, reported that the owner of Rirus as of 2010 was Shamalov alone.

    In February 2011, Novaya Gazeta, an independent newspaper in Russia, published documents indicating that senior officials in the presidential administration had approved plans for the Black Sea estate. The officials did so on two separate occasions, once during Putin’s second presidential term and again in 2008 when Putin was prime minister, said the paper.

    A group of journalists and activists who tried to visit the estate in February 2011 said it was being protected by the Federal Guard Service, a government agency whose role is to provide security for high-ranking officials.

    The Kremlin made no comment at the time. Two months later Vladimir Kozhin, head of the Kremlin’s Department of Presidential Affairs, said in an interview with the newspaper Kommersant that his department had been involved in the initial phase of the Black Sea estate, years earlier - but only as part of a project to encourage investors into real estate developments.

    Soon after the Novaya Gazeta reports, Russian billionaire Alexander Ponomarenko announced he had bought the unfinished estate from Shamalov for an undisclosed sum. Ponomarenko has said he views the property as an investment project and would rent parts of it out.

    The latest corporate records show Rirus is now owned by a Cypriot company.

    In an interview with Rossiyskaya Gazeta in 2012, Kozhin denied the property was for Putin. “There is no dacha of Putin in Gelendzhik,” he said. “What sort of estate is there? I don’t know ... I can officially, for the hundredth time, state: The President has three residences outside Moscow: Ogarevo in Moscow region, Bocharov Ruchei in Sochi, and in Valdai.”

    Kolesnikov left Russia in September 2010 and now lives in Estonia.

    EMIGRE: Sergei Kolesnikov, who left Russia to speak out about alleged corruption there, photographed in Antibes, France. Kolesnikov now lives in Estonia. REUTERS/Jean-Pierre Amet

    Two Putin associates, Nikolai Shamalov and Dmitry Gorelov, struck lucrative deals to supply medical scanners and other gear for Russia’s state health programme. Some of the proceeds from those deals, Reuters found, ultimately wound up helping to finance the luxurious mansion on the Black Sea popularly known as “Putin’s palace.”

    The money trail is a convoluted one.

    A UK-registered company owned by the two men, Greathill, received at least $195 million from sales of medical equipment to Russia.

    In total, Greathill sent some $84 million to accounts at the former Dresdner Bank in Zurich. According to bank statements reviewed by Reuters, more than $56 million went from Greathill to the Swiss accounts after 2006, when Putin’s national health project began.

    Those Swiss accounts were controlled by a Belize-registered company called Lanaval - a firm that was also owned by Shamalov and Gorelov, according to Sergei Kolesnikov, a former business associate of the two men.

    The claim that Shamalov and Gorelov own Lanaval is supported, in part, by documents reviewed by Reuters. The documents set out an arrangement under which Greathill agreed to act as an agent for Lanaval, remitting profits to Lanaval from business conducted by Greathill. Shamalov did not respond to written questions.

    No one from Lanaval could be reached for comment. A spokesman for LGT Group, the successor bank to Dresdner, said that under Swiss and Liechtenstein laws the bank was unable to respond to Reuters’ questions.

    Reuters reviewed more than 140 pages of Lanaval bank statements, covering 2003 to 2010. The statements indicate that between June and October 2009, Lanaval sent at least $48 million from its Zurich accounts to an account in Liechtenstein. The Liechtenstein account was controlled by a firm called Medea Investment, which is registered in Washington, DC, according to contract documents and corporate records.

    Medea supplied Italian building materials to the property known as “Putin’s palace,” according to an agreement dated June 2009 between Lanaval and Medea Investment.

    Under that agreement, which was reviewed by Reuters, Lanaval agreed to buy goods from Medea worth 37.5 million euros (about $52 million at the time). The contract says the goods were for a “big building project (resort)” in the region of Novorossiysk, on the Black Sea. Novorossiysk is a town near the palace, about 40 km (25 miles) away. The “big building project” and the “Putin palace” estate are one and the same, said Kolesnikov.

    The owner of Medea Investment is Lanfranco Cirillo, an Italian architect, Kolesnikov said. It was Cirillo, who has often worked in Russia, who designed the “Putin palace” property, Kolesnikov said.

    Reuters asked Cirillo, through Medea’s lawyer in Switzerland, about the contract, his ownership of Medea and his role as architect in the Black Sea development. Cirillo replied with a brief statement in which he confirmed his role as architect in the project. He said a Russian company had “assigned me the work” because of his skills. “I am specialised and focused in the creation of high standing objects in many countries of the world,” he said. He declined to go into detail.

    The Russian company Cirillo identified as his client is named Stroygazconsulting. Corporate records indicate no tie to Shamalov and Gorelov. Asked whether it had hired Cirillo to work on the Black Sea estate known as “Putin’s palace,” a spokeswoman for Stroygazconsulting said: “The story in question is an invention.” She added that the “only thing we can confirm” was that Stroygazconsulting and Cirillo had had a joint company “many years ago.”

    In any case, the contract documents reviewed by Reuters show that Cirillo’s firm Medea was paid by Lanaval, the company owned by Shamalov and Gorelov.

    Kolesnikov possesses a tape recording of what he describes as a 2009 meeting in St. Petersburg. There, he says, Shamalov, Gorelov and Cirillo - as well as Kolesnikov himself - discussed details of the Black Sea property and Medea’s involvement.

    On the tape, which was reviewed by Reuters, a man addressed by the others as “Lanfranco” talks in Russian about importing materials for the luxury estate via Medea Investment.

    The man says: “If I need to import through Medea Investment, then I need to open an official representative office for Medea Investment in Russia to receive permission for customs clearance, to receive money here for investment programmes and to pay roubles and to pay here.”

    When Kolesnikov talks of paying for the goods, “Lanfranco” asks whether paying “with black money to an American company” would be problematical. It is not clear what was meant by the reference to “black” money.

    Cirillo, who speaks Russian, declined to answer questions about Kolesnikov’s tape and did not say who the Black Sea property belonged to. He said in his written statement: “Every meeting held with my counterparty and any act connected thereto, that you may be aware of, was exclusively directed to define the construction work, its status and development, as well as payments to me for the services rendered.”

    The tape also includes a man identified as Shamalov by Kolesnikov - and referred to by others as “Nikolai Terentievich,” Shamalov’s first and patronymic names. On the tape, this man refers to Lanaval as “our company.”

    Shamalov did not respond to questions about the tape. Reuters was unable to confirm the identities of people speaking on the tape, and there is no reference on the tape to who owns the property being discussed.

    When Putin ordered up new hospitals, his associates botched the operation

    MEDICAL KIT: A new hospital in Perm, some 1,150 km (720 miles) east of Moscow, pictured in January. The facility, opened in February 2012, was part of Moscow’s push to spend more on areas such as health and education. REUTERS/Maxim Kimerling

    The president’s allies won contracts to build new medical centres across Russia. They failed, and the project hit $700 million in cost overruns

    PERM, Russia - At the foot of the Ural Mountains stands a symbol of how even the best intentions in Russia can enable well-connected individuals to bleed money from the state. It’s a modern hospital built in this industrial city of a million people, and intended to be a flagship of a grand project to improve the country’s healthcare.

    The hospital’s chain-smoking director, Sergei Sukhanov, loves his new facility, the Federal Centre for Cardiovascular Surgery, which has beds for 167 patients. He also admires Russian President Vladimir Putin, who championed the hospital and whose letter of thanks to the surgeon adorns his office.

    “It’s a huge gift to the Perm region,” said Sukhanov in his new white office. “It’s like we’ve moved from a one-bedroom apartment to a five-bedroom apartment.”

    But a Reuters investigation shows the hospital, and a $1 billion construction project of which it was part, were also business opportunities for Putin’s allies. While it isn’t clear whether they managed to turn a profit, their involvement cost Russian taxpayers dearly.

    A previous article detailed how two associates of Putin profited from selling high-tech medical equipment to the Russian state and sent money to Swiss bank accounts linked to the building of a lavish estate near the Black Sea.

    Those two men, Nikolai Shamalov and Dmitry Gorelov, also had stakes in two companies that received contracts to build a series of hospitals around Russia. The undertaking later led to accusations of “unjust enrichment” against one of the companies. That company ended up going bust, owing around 860 million roubles ($26 million) to the state. Hundreds of people lost their jobs.

    Corporate records show there was another major investor in the two building companies: Rosinvest, a Russian investment firm owned by offshore entities.

    In 2010 Sergei Kolesnikov, a businessman who used to work with the two Putin associates, went public with a claim that Rosinvest was ultimately controlled by the Russian leader himself. The role of Rosinvest in Putin's $1 billion health project, however, hasn't been previously reported.

    Kolesnikov says that Putin owned an offshore entity called Lirus Investment Holding, which had ultimate control of Rosinvest. He told Reuters that he knew this because he “participated in the creation” of Lirus. Lirus was a Liechtenstein company that, he said, was owned through bearer shares - securities that don’t record the name of the owner.

    Putin owned 94 percent of the company, Kolesnikov said, while he, Shamalov and Gorelov owned 2 percent each. Kolesnikov said he was informed by both Gorelov and Shamalov that they had given Putin his bearer shares and that Putin had placed these in a safe. “The situation was specially done in such a way that nowhere would be anyone’s signatures,” Kolesnikov said.

    Kolesnikov said he helped to manage a portfolio of investments through Rosinvest on behalf of Shamalov, Gorelov and himself. But the prime beneficiary, he said, was Putin. Kolesnikov said he delivered reports about the investments to Shamalov, and that Shamalov presented them to Putin.

    Putin’s ownership role in the project couldn’t be confirmed. The Kremlin did not respond to Reuters questions about Rosinvest, which was liquidated in 2012. In the past, Putin’s spokesman, Dmitry Peskov, has firmly denied any connection between Putin and Rosinvest.

    Shamalov and Gorelov did not respond to requests for comment on Kolesnikov’s account.

    This series examines Russian capitalism in the Putin era. A complex system of reward and obligation has operated among the elite since Putin gained power in 2000, with associates of the president tapping into the flow of funds from state coffers. In addition to breeding corruption, this system carries another cost: bungling and waste.

    The project to create the string of hospitals wound up costing about $700 million more than Putin called for and delivered two fewer hospitals than planned. A state agency involved in steering the project went under, leaving behind debts of $300 million.

    The hospital money would have been better spent on simple outpatient healthcare than on high-tech facilities, some Russian healthcare specialists said. Despite a large number of state-run hospitals and an army of doctors, many Russians only get access to the healthcare they need by paying private clinics or bribing state doctors.

    Overall, Russians have seen only limited advances in the nation’s medical care. Public-sector health spending in Russia remains low compared with the United Kingdom and other countries with government-financed healthcare: It equalled 3.7 percent of economic output in 2011, according to the World Bank. UK public spending on health was 7.7 percent of economic output that year.

    In the case of Putin’s hospital scheme, say some specialists, Russian taxpayers overpaid for trophy structures that don’t address the underlying causes of the nation’s health crisis.

    “These projects are just about PR,” said Kirill Danishevsky, a doctor and professor at Moscow’s Higher School of Economics specialising in healthcare. “Russia didn’t need new hospitals, and we certainly didn’t need the number of scanners they bought. What Russia needs is primary healthcare.”

    A SHARE OF THE ACTION

    It was in 2005 that Putin, then in his second term as president, initiated plans for Russia to spend $1 billion on 15 new medical centres for emergency, heart and prosthetic patients in cities spread across Russia, from Vladivostok in the east to Kaliningrad on the Baltic.

    Russian officials hired Cadolto, a German company skilled in a modular building technology, to provide the building blocks for seven centres. Officials granted the company a contract worth $270 million.

    AILING: A patient in a hospital in the town of Tver, some 170 km (106 miles) northwest of Moscow, in 2011. Russia’s health indicators, and many of its facilities, lag behind those in Europe and elsewhere. REUTERS/Diana Markosian

    But Putin insisted that some modules be built in Russia, not Germany, according to a Cadolto manager and Russian sources. That’s where Shamalov and Gorelov came in. They were associates of Putin and, as detailed in a previous article, they supplied scanners to the hospitals at what some medical professionals said were inflated prices.

    Corporate records show the two men held stakes in two other companies that got involved in Putin’s health project. These companies planned to build the next wave of medical centres, according to a former senior official overseeing the process and other sources familiar with the companies.

    The first was Rosmodulstroi, set up to build and own a module factory. The second company was St. Petersburg-based UK Modul, set up to manage the factory and handle contracts for supplying the modules to Putin’s hospital project. Rosinvest - which Kolesnikov alleges was controlled by Putin - was a major investor in both companies. (For more on the ownership trail, see related story.)

    SHUT DOWN

    The German contractor Cadolto began to supply modules for local Russian contractors to put up the first seven hospitals. Meanwhile, the Russians set up a factory in Cherepovets, a city about 530 km (330 miles) north of Moscow, to produce their own modules.

    UK Modul got an initial contract from a Russian state agency in July 2008 to supply half the modules for a hospital in the city of Chelyabinsk.

    In September 2009, the Russian state designated $448 million for the construction of another five federal medical centres in addition to those being built with Cadolto’s modules. Days later, DEZZ, the state agency then overseeing the health project, signed a further contract with UK Modul, according to court documents.

    Details of that UK Modul contract are not publicly available, and the court records don’t specify the projects involved or the value of the deal.

    The company appears to have won a role in building half a dozen of the hospitals, however. Vadim Mozhaev, who was head of DEZZ at the time, told Reuters that UK Modul was given a contract for building “five or six (medical) centres.” A St. Petersburg company, moreover, said on its website that it prepared project estimates for UK Modul for the Perm hospital and five other federal hospitals.

    DEZZ later updated its arrangements with UK Modul, specifying $97 million for the hospital at Perm, according to court documents. It also signed another contract with UK Modul for $15 million for supplying modules for a hospital at Smolensk.

    UK Modul failed to complete either project. In fact, it fulfilled its assignment at just one of the half-dozen hospitals it was engaged to build.

    The Perm job was a conspicuous flop. It took UK Modul more than a year to deliver all the modules, said Vladimir Sodomov, former deputy director of economics and procurement at Perm’s Heart Institute, who helped oversee the building.

    The prefabricated blocks were meant to be put together like Lego bricks, but didn’t fit because UK Modul had used the wrong plans, said one former executive at the company.

    “The holes weren’t in the right place. The modules should fit together and onto the foundations perfectly, but they didn’t,” said the former executive, who declined to be named because he still works in the industry. “They (UK Modul) had no expertise.”

    The problems were eventually resolved by another company, and the Perm hospital was completed in February 2012, almost a year after UK Modul had been replaced.

    GOOD HEALTH: Nikolai Shamalov was one of two wealthy Putin comrades to win contracts to build a series of hospitals. The undertaking saw a private firm the men co-owned go bust. Businessman Sergei Kolesnikov verified the person in this photograph, which appeared on a Russian website. Reuters is unable to independently verify the location, source or date of the photograph.

    Shamalov did not respond to written requests for comment. Gorelov declined to be interviewed, but sent a written statement in which he said: “I was a passive shareholder in the indicated companies. The business ideology and direct management of their activities was carried out by other shareholders, members of the board of directors and the directors of the companies. In connection with this I don’t have information about the questions that interest you.”

    Several former managers and employees at UK Modul said the Russian state was partly to blame for the Perm fiasco, because it did not pay bills on time.

    In February 2011, Viktor Rusanov took over as head of DEZZ, the agency overseeing the hospital project. He told Reuters that UK Modul failed to deliver on agreed tasks and “wanted yet more money.”

    As problems mounted with UK Modul’s work on the Perm hospital, DEZZ cut back UK Modul’s state contracts. Eventually, in March 2011, it cancelled them altogether.

    Workers who turned up at the Cherepovets factory in March 2011 were greeted with a curt notice informing them it was closed. A subsequent letter from management told them that UK Modul had lost its government financing, leaving the company unable to pay wages and forcing it out of business.

    “Six hundred people worked in the factory, and they were simply chucked on the street,” Gennady Smirnov, one of the workers, told Reuters.

    Smirnov said he and many other workers were not sent vital labour documents enabling them to seek work elsewhere or claim unemployment benefits. He said he was left out of work for a year and had to borrow money from his mother-in-law to pay the mortgage on his apartment.

    OPENING CEREMONY: Sergei Sukhanov, head of Perm Medical Centre, at its opening in February 2012. The hospital was a flagship of a grand project to improve the country’s health care. REUTERS/Maxim Kimerling

    LATE AND EXPENSIVE

    Given the chaotic end to the efforts of Rosmodulstroi and UK Modul, it is hard to tell whether their shareholders made a profit on Putin’s hospitals. What is clear is that the state felt it received poor value for money - so much so that it sued UK Modul for damages.

    The president’s associates managed to complete just one of their half-dozen hospital projects, according to former UK Modul insiders - the deal to provide half the modules for the Chelyabinsk hospital.

    In the end, Russia imported more modules and built 13 of the planned 15 hospitals in Putin’s grand health project. It took around five years longer than envisaged. Cadolto, unlike UK Modul, met its contracts and there is no suggestion it was responsible for any delays.

    The final cost to the Russian federal government for the project was about 70 percent more than first budgeted: $1.69 billion, according to official documents seen by Reuters.

    UK Modul wasn’t the only problem. Two hospitals in which UK Modul wasn’t involved failed completely. The hospital at Krasnodar was knocked down because mould ruined the modules after they had been installed. Another at Vladivostok was cancelled after delays and cost overruns.

    It was left to Russian taxpayers to clear up the mess.

    Technointorg, a state organisation that oversaw the early phases of the hospital building programme and the supply of medical equipment, ended up going bankrupt in September 2013. It left debts of more than $300 million.

    Its successor, DEZZ, sued UK Modul over its $97 million contract to build the Perm hospital.

    Judges upheld that claim and ordered UK Modul to pay $22 million. More than half of the amount was for "unjust enrichment" for failing to meet its obligations in terms of deadlines and standards, according to documents from the Moscow commercial court.

    IN FOCUS: A Siemens scanner in the new Perm medical centre. REUTERS/Maxim Kimerling

    UK Modul never made good on that money. The company went bankrupt in May 2012. Its assets, worth $26 million on paper, fetched $40,000.

    Russia’s Ministry of Health did not answer questions about the financing and construction of the hospitals. But in a written statement it said: “Realising the measures of the priority national project in the area of Healthcare actively encourages improvement of the demographic situation. The development of specialised, including high-technology, medical aid is one of the basic directions of the activity of the Ministry of Health and Social Development of the Russian Federation.”

    Dashinevsky, the professor at the Higher School of Economics, said Russia’s health system has suffered chronic underfunding for the last 10 to 15 years and become increasingly riddled with corruption and inefficiency. The botched hospital programme, he said, helps explain why.

    “Healthcare is just one typical sector of the Russian economy. There is no special disease of healthcare,” he said. “It’s a general disease of the state.”

    (Additional reporting by Brian Grow in Atlanta and Christian Hetzner in Nuremberg. Editing by Richard Woods and Simon Robinson.)

    Unless otherwise indicated, currency conversions at $0.0304 per rouble, and $1.374 per euro, the rates at the end of 2013

    Next, Part 3: Russian Railways paid billions of dollars to secretive private companies

    The two obscure companies that bungled Putin’s hospital-building project were part-owned by two of the president’s longtime associates, corporate records show.

    One was Rosmodulstroi, set up to build and own a module factory. Nikolai Shamalov and Dmitry Gorelov, the Putin associates, each owned 10 percent of the business, according to the company’s founding documents. Russian businessman Sergei Kolesnikov also had a 10 percent stake, according to the documents.

    A company called Rosinvest held the biggest stake: 50 percent of shares, corporate records show. Kolesnikov alleges Putin was the ultimate beneficiary of Rosinvest, a claim the Kremlin has denied. (Rosinvest disposed of its holding in 2011. That same year, Gorelov and Shamalov raised their stakes to 25 percent each, according to corporate filings.)

    Three other Russian businessmen owned the remaining 20 percent of Rosmodustroi when it was set up. Two of them were businessmen from St. Petersburg, Vladimir Vasiliev, head of a construction company, and Oleg Medoev, head of a real estate company. They each owned 5 percent of Rosmodulstroi, according to the company’s founding documents. And a 10 percent stake was held by Vadim Mozhaev, a Russian executive at Siemens, the German company that supplied high-tech scanners and other equipment to hospitals in Putin’s grand health project.

    Mozhaev left Siemens in 2010 and became head of DEZZ, a Russian government agency overseeing Putin’s hospital project. He said his appointment to DEZZ had no connection to his interests in Rosmodulstroi or UK Modul, another company involved in the hospital project. He said that when he joined DEZZ he disposed of all his shareholdings. “Formally I had to transfer it (his shareholdings), so that there wouldn’t be a conflict of interests,” he said.

    UK Modul was a company set up by the same owners as Rosmodulstroi to manage the module factory and handle contracts for supplying the modules to Putin’s hospital project.

    Both Rosmodulstroi and UK Modul were registered on Dec. 28, 2006, each listing the same people as shareholders. In corporate documents held by Kolesnikov and reviewed by Reuters, both companies gave the same address in St. Petersburg.

    Also located at that address is a company called Petromed - the same firm that supplied scanners to Putin’s new hospitals, as detailed in the first story in this series. Gorelov and Kolesnikov are among Petromed’s investors, corporate documents show.

    The two hospital-building companies eventually ran into financial difficulties. UK Modul went under in 2012. One reason it had so little money left was that it had lent $9 million to its sibling company, Rosmodulstroi. That sum was never repaid.

    Rosmodulstroi’s accounts show that as of the end of 2012, its debts exceeded assets by $27 million, and it recorded a loss of $16 million. A small debtor began bankruptcy proceedings against Rosmodulstroi in June 2011 that continue.

    Russian taxpayers footed the bill left behind by Putin’s associates. Rosmodulstroi was acquired in July 2013 by the state-owned conglomerate Russian Technologies - the parent organisation of one of the two state agencies that awarded the hospital contracts.

    Russian Railways paid billions of dollars to secretive private companies

    LEADER: Vladimir Putin in Russia’s first high speed train, December 2009. REUTERS/Ria Novosti/Alexei Druzhinin/Pool

    The state-owned rail giant, run by an old friend of President Vladimir Putin, has awarded vast sums to contractors who disguise their ownership, a Reuters investigation finds

    MOSCOW - 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.”

    RAIL MAN: Vladimir Yakunin, President of Russian Railways, during a visit to Omsk, August 2012. Yakunin has known Putin since they both lived in St. Petersburg in the 1990s. REUTERS/Dmitry Astakhov/RIA Novosti/Pool

    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.

    Russian Railways and the hunt for its mysterious contractors

    ON THE TRAIL: Reuters reporter Douglas Busvine hits the streets of Moscow to search for private firms listed as rail contractors - and finds some of them strangely elusive.

    ON THE LINE: In Kannelyarvi, some 80 km from St. Petersburg, workers inspect the high speed rail link to Finland. One of the biggest beneficiaries of the project was a private contractor called Setstroienergo. REUTERS/Alexander Demianchuk

    THE AUCTIONS

    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.

    Russian Railways and the great money-go-round

    SPEED: Millions of dollars from state-owned Russian Railways appear to have gone to private companies with little sign of doing work on Russia’s rail system. REUTERS/Timo Jaakonaho/Lehtikuva

    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.

    THE TRANSACTIONS

    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.

    EMIGRE: Former banker German Gorbunstov, in England, early 2014. Gorbuntsov left Russia with records that show millions of banking transactions. REUTERS/Andrew Winning

    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.”

    WAITING: The fast line to Finland passed through Zelenogorsk, some 60 km from St. Petersburg. REUTERS/Alexander Demianchuk

    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.

    (Additional reporting by Gleb Stolyarov. Editing by Richard Woods and Simon Robinson.)

    Currency conversion at 1 rouble to $0.0304, the rate at the end of 2013

    EDITOR’S NOTE: This story is based in part on a database of banking transactions provided by German Gorbuntsov, a Russian former banker now living in exile. Reuters confirmed aspects of the database by showing samples of account numbers and the names of corporate account holders to people inside Russia’s tax service. They said the records corresponded with tax office records. A former employee at one railway contractor - who has no connection to Gorbuntsov - also disclosed internal records of his firm’s dealings with Russian Railways. Those details corresponded with banking transactions recorded in Gorbuntsov’s database. Some money transfers from Russia to banks abroad shown in the database were also cross-checked against banking records disclosed in New York in an unrelated case. They, too, corroborated Gorbuntsov’s database.

    MOSCOW - The patterns of bank transactions relating to Russian Railways described in a Reuters investigation show signs of so-called suspicious banking activity, according to Russian and U.S. financial investigators and consultants. But some cautioned that the unusual activities, while meriting further attention, don’t necessarily constitute illegal behaviour.

    MOSCOW: One of the offices of InterProgressBank. According to corporate filings late last year, the bank is part-owned by Andrei Krapivin. REUTERS/Tatyana Makeyeva

    Courtney Linn, a former U.S. federal prosecutor, said the payments to Russian Railways contractors and complex subsequent transactions contain signals of possible money laundering which, if they occurred in the United States, would likely trigger an investigation.

    “If, as it appears here, the money is moving in a gigantic swirl, the purpose of the transactions is unclear and the beneficiaries are not obvious, and behind this is government money: These would together push all the buttons,” Linn said. “It would make for a really high priority for law enforcement.”

    Sergei Lesnichiy, of Moscow’s state-backed Centre for Financial Investigation, said the contract bidding identified by Reuters was unusual - but not necessarily illegal in Russia. “It isn’t a crime in Russia for two related companies to compete against each other in a tender,” he said. “It isn’t a crime for them to have nominee owners. Nor is the lack of a real business a crime in itself - although it may be an indication of a crime.”

    SNAPSHOT: Andrei Krapivin, seen here in a passport photograph, was once described by Russian Railways boss Yakunin as an “old acquaintance.”

    He added: “If the cost of work is inflated to a level not justified under market conditions it would be an abuse of office by the railway officials involved. If those officials and those who benefited were affiliated, then it would meet the Russian legal definition of fraud.”

    Adam Kaufman, former chief of investigations for the Manhattan district attorney and now a partner with the law firm Lewis Baach, cautioned that there was a large gap between identifying suspicious transactions and proving any illegality.

    “I am wary of any allegation of money laundering based solely on bank records. With some countries, including Russia, you can never get the evidence you need, unless there is a political will to provide it,” Kaufman said.

    Every year state-owned Russian Railways does business worth billions of dollars with private sector companies. They include a number of organisations where Andrei Krapivin - a banker once described by Yakunin, head of Russian Railways, as an “old acquaintance” - has held board positions or share stakes. Krapivin is a large shareholder in Interprogressbank (IPB), a Moscow private bank. He and other senior figures at the bank have connections to Russian Railways as detailed below.

    Andrei Krapivin

    1. Director of Rusagrotrans from 2008, according to corporate documents. The company was founded that year with the approval of Russian Railways, according to its website, and is now Russia’s top grain shipper by rail, operating 30,000 rail cars.
    2. Director of Transmashholding, a locomotive and railway carriage manufacturer, from 2008 to 2012.
    3. Director of Freight One, which calls itself “the leading freight operator in Russia,” from 2007 to 2011.
    4. Owner of 28 percent of IPB, according to corporate filings in Dec., 2013.

    Valery Markelov

    1. Director of Lengiprotrans, a design company that carried out 1.7 billion roubles ($52 million) of research and development work for Russian Railways in 2012, according to financial statements.
    2. Shareholder in oil trading company Moboil, which receives $500 million a year for supplying fuel to the railways.
    3. Owner of 85 percent of Moscow security firm Legion-2, which advertises that it provides security for Russian Railways.
    4. Director of IPB and owner of 28 percent of the bank, according to corporate filings in Dec., 2013.

    Boris Usherovich

    1. Director of Lengiprotrans, design company that does work for Russian Railways.
    2. Director of IPB and owner of 15 percent of the bank, according to corporate filings in Dec., 2013.

    Alexei Krapivin

    1. Director of Lengiprotrans, design company that does work for Russian Railways.
    2. Director of Roszheldorproject, design company part-owned by Russian Railways. It performed 26 billion roubles ($790 million) of work for the railways in 2012.
    3. Director of IPB, where his father, Andrei, is a shareholder.

    Reuters sent written requests for comment on this story to the main shareholders in IPB, both via IPB and their registered home addresses. They did not respond.

    About the series

    After the collapse of the Soviet Union in 1991, Russia became a wild east in which communist central planning was supplanted by crude, free-wheeling capitalism. A small number of people - dubbed “oligarchs” by the press - became enormously wealthy by seizing control of state assets or buying them at knock-down prices. President Vladimir Putin, who came to power unexpectedly on the last day of 1999, re-imposed stability, while stronger oil prices fueled growth.

    But critics of Putin’s Russia, both inside the country and out, contend that a well-connected elite continues to enrich itself unfairly from the state.

    Early last year Reuters journalists set out to investigate how that happens. The team, led by special correspondent Stephen Grey, found evidence that the key to making money now is not seizing control of firms but tapping into state spending.

    The reporters examined some of the Russian state’s biggest spenders - including the health system and publicly-owned Russian Railways. They found that large sums of public money were regularly paid to obscure private companies, and that substantial expenditure was captured by well-connected individuals.

    Some information - billions of dollars of Russian Railways’ tenders for outsourcing work, for instance - was publicly available. Reporters analysed that data and other information provided by sources, including two years’ records of transactions through two Moscow banks. Further details were gathered from dozens of interviews and on the ground reporting in Russia and other countries.

    Though each element of the inquiries was different, the end results showed a pattern: Significant sums of state money were passing either through intermediaries with links to Putin or into companies with secretive owners.


    Comrade Capitalism: a Reuters investigation

    Reporting team: Stephen Grey, Douglas Busvine, Jason Bush, Roman Anin, Elizabeth Piper, Himanshu Ojha, and Maria Tsvetkova.

    Additional reporting: Timothy Heritage, Brian Grow, Gleb Stolyarov, Jack Stubbs, Alexander Winning, Maria Golovnina, Jens Hack, Polina Devitt, Clare Kane, and Christian Hetzner

    Data: Himanshu Ojha

    Web programming: Charlie Szymanski

    Graphics: Matthew Weber and Maryanne Murray

    Design: Troy Dunkley

    Picture editor: Simon Newman

    Video: Julian Satterthwaite, Juris Abramenko and David Dormer

    Series editors: Richard Woods and Simon Robinson

    Contact: stephen.grey@thomsonreuters.com