How Russia does business in the Putin era

REUTERS/Thomas Peter

Opaque middlemen exact high price in Russia’s deals with the West

Part 7: Some major Western firms sell life-saving medical equipment to Russia via obscure intermediaries who bump up prices. It means Russian citizens pay over the odds and big profits disappear offshore.

MOSCOW/LONDON  – Russia pays hugely inflated prices for vital medical equipment made by Western companies, in part because some manufacturers channel sales through obscure intermediary companies, a Reuters examination has found.

These middlemen firms, which have no easily traceable owners or offices, add mark-ups that mean Russian state hospitals frequently pay two or three times more than hospitals in the West for the same equipment. A Reuters examination of Russian customs data and state procurement records shows the price differences can be hundreds of thousands of dollars on a single item.

An analysis of 20,000 transactions dated between January 2006 and July 2013 found that international companies sold Russia medical devices worth more than $2.8 billion through more than 150 obscure companies and partnerships. These offshore intermediaries give addresses that are letterboxes at law and accounting firms. Their ownership is hidden behind nominees or held in jurisdictions where public shareholder registers are not available.

The transactions illustrate how Western companies play a part in the brand of capitalism that has developed under Russian President Vladimir Putin. As Reuters has documented this year, in Putin’s Russia intermediaries are sometimes inserted into deals to exploit state spending.

The use of opaque intermediaries signals a risk that the hidden owners may inflate profits, siphon off funds or facilitate bribery, according to lawyers and corporate governance specialists. By agreeing to deal with such middlemen, Western firms help sustain the system that has flourished under Putin.

Moscow itself has recognised the issue. In 2010, then President Dmitry Medvedev ordered an investigation into how state hospitals overpaid for equipment. After the probe, some manufacturers, including America’s General Electric Co and Japan’s Toshiba Corp, stopped doing business with Russia through obscure intermediaries. GE and Toshiba had no comment on the change.

But Reuters found that other big international firms, including the Dutch electronics company Philips and Germany’s Siemens, continued to use non-transparent intermediaries. Between January 2011 and July 2013, Philips and Siemens combined sold $120 million of equipment through such go-betweens – in each case about 35 percent of their Russian sales during that time.

Overall, sales of medical equipment by Western and other international firms that went through obscure intermediaries amounted to more than $600 million between January 2011 and July 2013, according to the most recent Russian data available. That accounts for about 18 percent of foreign manufacturers’ equipment sales to Russia that Reuters could identify during that period.

Officials at several multinationals that still regularly use offshore intermediaries said they screen partners by searching publicly available information and data. These people said manufacturers should not be blamed for using intermediaries if such searches reveal nothing wrong with the companies.

A spokesman for Siemens said the company conducted “thorough due diligence” on intermediaries, including resellers of medical equipment.

Stephen Klink, a spokesman for Philips, said: “We have dedicated governance programmes in place relating to our business partners. This programme consists among other things of a company-wide mandatory due diligence process that screens the use of third parties, such as distributors.”

There is nothing intrinsically unlawful about doing business with little-known intermediaries. Still, U.S. and European anti-bribery laws require firms to make checks on all business partners. The International Chamber of Commerce’s guidelines on combating corruption say companies should look out for “red flags.” These include transactions involving countries with a high reputation for bribery; situations where a third party does not reside in the country where the final customer is located; and cases where due diligence reveals that the third party “is a shell company or has some other non-transparent corporate structure.”

Michael Hershman, president of the Fairfax Group, which advises multinational companies and governments on tackling corruption, said: “There is absolutely no good business reason to use these cut-out companies in these offshore locations … It’s an absolute, 100 percent red flag. Western companies know this is a risky area of activity.”

Asked why intermediaries are used, Alexei Levchenko, spokesman for Olga Golodets, the Russian deputy prime minister in charge of healthcare, said: “The state is interested in buying the best product for the most favourable price … It is not important who is the seller – a subsidiary of an importer, a distributor or any other company.”

He said that if there was evidence of hospitals being overcharged, it should be investigated by anti-monopoly and law enforcement bodies.

VITAL SIGNS: Russian records show that state hospitals regularly overpaid for scanners such as Philips’ iU22 model. Philips/Handout

INFLATED PRICES

Russia’s healthcare system deteriorated in the last days of the Soviet Union and grew even worse in the chaotic 1990s. The country has high incidences of AIDS, tuberculosis, cancer and cardiovascular disease compared with Europe. In the Putin era, health standards have improved, but problems remain.

Public health officials say many patients suffer from poor and late diagnosis of their ailments. Medical scanners can help doctors detect illnesses before they become untreatable  – but such equipment is expensive. The average cost of an ultrasound machine in the United States is around $110,000, according to the Modern Healthcare/ECRI Institute Technology Price Index.

In Russia, prices are much higher.

In May 2011, the Centre of Cardiovascular Surgery in Astrakhan, in south-west Russia, bought a Philips iE33 ultrasound scanner, which is used to diagnose heart disease. Under the exchange rate prevailing at the time, the hospital paid $580,000 for the machine, public procurement records show. In December that year the Almazov Medical Research Centre in St. Petersburg bought the same model scanner for $490,000, according to procurement records.

At that time, hospitals in Europe and North America were paying around $145,000 for the iE33, according to information from dealers in the United States, Europe and Africa and a database of public procurement in European Union countries.

The large difference between prices in Russia and the West wasn’t just an anomaly with one particular machine. In another case, the Endocrinology Research Centre in Moscow bought a Philips iU22 scanner, a device used to identify breast and other cancers, for $360,000, according to Russian state procurement filings. That was about three times the price hospitals in the United States and Europe were paying at the time for the same scanner.

Reuters studied 22 cases where Russian hospitals purchased Philips’ iE33 and iU22 ultrasound machines between January 2011 and July 2013, according to procurement records. On average, the prices were more than double those paid by hospitals outside Russia for the same machines. Neither Philips nor the dealers involved in the sales would comment on why the machines were so expensive in Russia.

“JUST A POSTBOX”

The high prices in Russia arise from mark-ups added by intermediaries, said Felix Lam, senior analyst at healthcare research provider Decision Resources Group, who has studied the Russian medical scanner market. That conclusion is supported by Russian data seen by Reuters. Customs records show that when companies such as Philips and Siemens sell directly to importers in Russia, they charge prices in line with what they charge in the West.

MARK UP: When Moscow’s Endocrinology Research Centre bought a Philips scanner in 2012 it paid about three times the going rate in the West. REUTERS/Maxim Zmeyev

“There is absolutely no good business reason to use these cut-out companies.”

Michael Hershman, president of the Fairfax Group

When Philips sold an iU22 direct to a Russian distributor in December 2012, for instance, it charged just $106,000.

The convoluted trail behind the sale of another Philip’s iU22 scanner to Russia in 2012 produced a very different result. The device was sold through a British firm, Rainham LLP, which sold it to a Russian firm called Tierbach, which is one of Philips’ official distributors in Russia. Tierbach then sold it to the Endocrinology Research Centre in Moscow. The final price: $360,000.

Rainham is a partnership registered at the offices of Carey Group, a financial and tax planning firm in the English town of Milton Keynes. “We’re just a postbox for them,” said Carey Group’s office manager, Christine Hallett. The partners of Rainham are two companies in the Caribbean island of Anguilla, which does not require companies to reveal their owners.

It’s not clear how much Rainham paid Philips for the iU22 scanner. But if it bought the scanner at the normal wholesale price in the West of around $110,000, Rainham stood to make a large profit. Customs documents show Rainham sold the machine for $325,000 to Tierbach; procurement records show that Tierbach then sold the machine on to the Endocrinology Center for $360,000.

Russian data show that between 2006 and 2013, Rainham supplied Tierbach and an affiliated company, Darton MS, with at least eight scanners that ended up being sold to Russian state hospitals for multiples of their normal Western prices.

Tierbach, Darton, and Rainham did not respond to requests for comment. The hospitals involved declined to comment. Philips said it did not comment on other companies, whether business partners or not.

BIG BRANDS: Toshiba stopped using intermediaries for its Russia sales, but other global names continued to use them. REUTERS/Yuriko Nakao; Toussaint Kluiters/United Photos; Thomas Peter

Rainham’s accounts show that its auditor refused to sign off its accounts between 2009 and 2012. The auditors objected because Rainham paid more than £5 million in commissions and another £5 million in other costs for which the auditors were “unable to obtain sufficient appropriate audit evidence.”

The audit firm declined to provide more details. The registered agents of Rainham and its owners did not respond to requests for comment.

HARD TO TRACE

In all, Reuters found that between January 2011 and July 2013 foreign manufacturers sold Russia products worth hundreds of millions of dollars a year through companies that have no easily traceable office or owners.

In that period Philips sold $63 million of equipment to Russia through such middlemen, while Siemens sold equipment worth $58 million. Those amounts were 37 percent of all the Philips’ equipment that Reuters could identify as being sold into Russia during that time, and 35 percent of Siemens’ sales.

Obscure intermediaries were also involved in some Russian sales by lesser-known companies, including the German firms Draeger and Berver, and the French company Apelem. Berver and Apelem declined to comment. A Draeger spokesman said the company went to “considerable efforts to screen the distributors we work with.”

Reuters found that more than 150 intermediaries involved in the equipment sales to Russia had addresses that proved to be the offices of law or accounting firms, “virtual office” providers or other stand-ins.

Owners of these intermediaries could not be traced. Most of the firms were registered in or owned via jurisdictions such as the British Virgin Islands, Liechtenstein, Switzerland and Panama, where owners do not have to be publicly disclosed. Others were owned by businesses or individuals acting as nominees – in other words, acting on behalf of unidentified people.

Reuters attempted to contact lawyers, accountants, nominee owners, agents and directors for over 150 middlemen firms, either in person or by email, letter or telephone. None of them responded to requests for comment.

“COMMISSIONS”

There was no evidence that any manufacturer named in this story knew of or condoned illegal activity by intermediaries in their supply chains.

“We have dedicated governance programmes in place relating to our business partners.”

Stephen Klink, spokesman for Philips

A nominee director involved in two UK-based intermediaries told Reuters that these middlemen companies had been established for two purposes: To help Russia-based businessmen keep profits beyond the reach of the Russian tax authorities and to channel “commissions” to hospital officials.

“On occasion, he (the Russian beneficial owner) will say, we have to pay a commission to some guy,” the nominee director said. “It happens every couple of months. It’s maybe $10,000 to $15,000.” The nominee director did not specify what the commissions were for.

Russian authorities, aware of the risk of inflated prices and potential corruption, have mounted some investigations. In one case, Russia’s Federal Antimonopoly Service (FAS) alleged that in 2010 Siemens sold equipment to a Swiss firm called Diatech SA for $3 million. This equipment was then sold to a state hospital in eastern Russia for $12 million, according to the FAS.

The FAS said the procurement process had been inappropriate and put the increased price down to the use of an intermediary. It fined Siemens’ Russian affiliate 23.5 million roubles ($680,000 at the time). Siemens said it appealed against that ruling in court and won, rendering the fine unenforceable.

Diatech SA, whose address is the office of a Swiss lawyer, did not respond to requests for comment.

Siemens declined to say whether $12 million was a reasonable price for the MRI, CT and X-ray scanners it supplied. It said that resellers were free to set their own pricing.

Note: Currency conversions at rates prevailing at the time of transactions.

Additional reporting by Roman Anin, Jason Bush and Maria Tsvetkova in Moscow, and Jack Stubbs in London. Edited by Richard Woods and Michael Williams


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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

Part 1: 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”

Русский язык (Russian translation)

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.

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.”

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

A GRAND PROJECT

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.

“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.”

Vladislav Inozemtssev, director of the institute for Post-Industrial Studies, a think tank in Moscow

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.

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.

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.

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.

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.

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.

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.)

“One hundred and thirty million roubles is a clearly inflated price.”

Alexei Popov, a Russian surgeon who has researched the pricing of medical scanners

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


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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

Part 2: The president’s allies won contracts to build new medical centres across Russia. They failed, and the project hit $700 million in cost overruns

Русский язык (Russian translation)

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

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.

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.

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.

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.

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.

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

“Six hundred people worked in the factory, and they were simply chucked on the street.”

Gennady Smirnov, one of the workers who lost their jobs at the Cherepovtes factory where Putin’s associates had stakes

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.

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


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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

Part 3: 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

Русский язык (Russian translation)

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.

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

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.

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.

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 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.

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.

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

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.”

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


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In murky Pentagon deal with Russia, big profit for a tiny Florida firm

UNDER SCRUTINY: Onlookers watch as an Atlas V rocket lifts off from Vandenberg Air Force Base in California in December 2013. The American rockets, built by United Launch Alliance, are powered by Russian engines. REUTERS/Gene Blevins

Part 4: The Air Force relies on rocket engines made by a company overseen by associates of Vladimir Putin. Documents show a U.S.-Russian middleman stands to make $93 million on the contract.

Русский язык (Russian translation)

ATLANTA/MOSCOW – For months, a powerful U.S. senator has been pushing for details of a murky deal under which a Russian manufacturer supplies the rocket engines used to launch America’s spy satellites into space.

At issue: how much the U.S. Air Force pays for the engines, how much the Russians receive, and whether members of the elite in President Vladimir Putin’s Russia are secretly profiting by inflating the price.

Now, documents uncovered by Reuters provide some answers. A tiny Florida-based company, acting as a middleman in the deal, is marking up the price by millions of dollars per engine.

That five-person company, RD Amross, is a joint venture of Russian engine maker NPO Energomash and a U.S. partner, aerospace giant United Technologies. According to internal company documents that lay out the contract, Amross stands to collect $93 million in cost mark-ups under its current multi-year deal to supply the RD-180 rocket engine.

Those charges are being added to the program despite a 2011 Pentagon audit that contested a similar, earlier contract with Amross. That deal would have allowed Amross to receive about $80 million in “profit” mark-ups and overhead expenses on RD-180 engines, government documents show.

The confidential report of the 2011 audit described the mark-ups and additional charges as improper under U.S. contracting law. Amross, the auditors concluded, was a middleman that did “no or negligible” work. The audit characterized the $80 million in added costs as “unallowable excessive pass-through charges.”

A spokesman for RD Amross told Reuters that the company resolved the dispute by reducing its charges under the first contract. Neither Amross nor the Pentagon would disclose the dollar amount of the price cut.

But the documents indicate that Amross later managed to make up for the concessions. In the current deal, Amross is charging the same average total price per engine - $23.4 million – that was proposed in the initial contract rejected by the Pentagon auditors.

The disclosure of the middleman’s profits and the 2011 contract dispute is likely to increase scrutiny of the deal - and the Russians behind it.  

Sen. John McCain, R-Arizona, is seeking to end funding for future purchases of the Russian engines in the coming year’s Defense Department budget. In June, he wrote to the Pentagon’s chief of procurement seeking details about the price of the engines and the role of Florida-based Amross as a middleman. In his letter, McCain said he suspected that the Air Force was being overcharged. The Pentagon hasn’t divulged the information he sought.

Told of the Reuters findings, McCain said he has been expressing deep concern to the Obama administration that U.S. taxpayers “are paying millions of dollars to companies that may have done no work but merely served as a ‘pass-through’ to enrich corrupt Russian businessmen connected with Vladimir Putin.” The administration’s response, he said in a written statement, signals “it is either ignorant of these allegations or unwilling to investigate them. This is unacceptable.”

The Russian engine is a critical component in Atlas rockets, the workhorse of the U.S. military’s satellite program. The latest Atlas model is made by United Launch Alliance, a joint venture of Boeing and Lockheed Martin. ULA has a long-term contract with the Air Force to put America’s military and reconnaissance satellites into space. Many of the country’s most sensitive missions could be grounded if the supply of RD-180s were cut off.

At a projected cost of $70 billion through 2030, the launch program is one of the biggest acquisition deals in Pentagon history. And because the program leaves Washington dependent on engines made in Russia, it is a potential flashpoint at a time of renewed Cold War tensions.

IN HIS ORBIT: President Vladimir Putin takes a close interest in Russia’s space companies. Here, as prime minister in 2009, he talks to staff at Energomash, maker of the RD-180 engines that power U.S. Atlas V rockets. REUTERS/Ria Novosti/Pool/Alexei Nikolsky

“It is outrageous that the United States today remains dependent on Putin’s Russia, particularly for a national security space launch program,” McCain said.

In a series of stories, Reuters is investigating how Putin has transformed Russian capitalism by letting people close to him benefit from major state programs or lucrative public contracts, often using intermediary companies. In the RD-180 deal, the United States risks getting caught up in that system.

ALLIES OF PUTIN

The Russian government owns 86 percent of Energomash, maker of the RD-180 engine. The company falls under the supervision of Dmitry Rogozin, the deputy prime minister responsible for the defense and space industries. Rogozin was among a number of Russians sanctioned by the Obama administration in March in retaliation for what the West says are Moscow’s efforts to destabilize Ukraine.

The sanctions against Rogozin nearly derailed the engine program. A U.S. rival to ULA, Space Exploration Technologies, won a federal court order freezing the Energomash deal in April on the grounds that the Pentagon shouldn’t deal with a company overseen by a sanctioned foreign official.

The Obama administration, faced with losing the only ready supplier of the engine, opposed the move. The administration argued that it wasn’t required to cut off business with Energomash because it had made no determination that Rogozin controlled the company. In response, the judge lifted the freeze.

But Rogozin isn’t the only associate of Putin involved in Energomash. A closer intimate of the president has played an important role in the company, corporate ownership documents show.

That man, billionaire businessman Yuri Kovalchuk, is one of Putin’s oldest friends. In March, he too was sanctioned over Ukraine. The U.S. Treasury cited his close ties to Putin, describing Kovalchuk as the Russian president’s “personal banker.”

In October 2010, Kovalchuk took partial control over Energomash when Putin ordered that the business be placed under the oversight of another state-owned space company, RSC Energia. Through an asset management firm that he controlled until this spring, Kovalchuk had control of a minority stake in Energia.

With the support of the Russian space agency, Kovalchuk thus became a key player in both Energia and Energomash, according to a senior manager at Energia. The billionaire’s brother served as chairman of Energia from 2011 to 2013. Kovalchuk’s role at Energomash hasn’t been previously reported. (See related story on Kovalchuk and Rogozin).

A person close to Kovalchuk declined to address Reuters’ questions about the corporate registration documents tying him to Energomash. This person said: "Assumptions regarding management functions and any control of Y.V. Kovalchuk in the companies RKK Energia and NPO Energomash are false." Kovalchuk’s brother, Mikhail, declined to comment.

In March, shortly before the United States announced sanctions against Kovalchuk and others, Kovalchuk’s interests in Energia and Energomash were transferred to another member of Putin’s circle.

MISSING MILLIONS

Much remains unclear about the RD-180 program, including the price the Air Force ultimately pays for the engines and what becomes of all the profit earned by Amross.

Washington isn’t the only capital where the deal has raised questions. Russian government auditors informed the Kremlin in 2010 that Energomash was making large losses on the RD-180 deal, in part because proceeds were being captured by unnamed offshore intermediary companies.

According to unpublished records of Russia’s federal Audit Board, Energomash made a $50 million loss from the engine sales to the United States from 2008 through 2010. The shortfalls were the result of mismanagement by unnamed former executives who sold the engines to Amross for less than their production cost, the auditors estimated.

“In reality, money was made, but it didn’t come to the country,” Vitaly Davidov, then deputy director of the Russian Federal Space Agency, told a 2011 meeting of the Audit Board, according to minutes of the gathering.

U.S. reliance on the RD-180 is a byproduct of post-Cold War warming.

“In reality, money was made, but it didn’t come to the country.”

Vitaly Davidov, former deputy director of the Russian Federal Space Agency, on sales of Russian engines to the United States

In the 1950s and 1960s, Soviet engineers developed rocket engines that used liquid oxygen and kerosene to generate great thrust, putting heavier rockets and payloads into space. The United States had its own engines, but by the 1990s it had stopped making ones powerful enough for the biggest jobs. With the Cold War over, Washington turned to Russia, and in 1996 the RD-180 was selected to power Atlas rockets.

But Energomash has never sold the engines directly to the rocket program. Instead, it has sold them to a joint venture it set up with a unit of United Technologies. The engines are then resold to the Pentagon’s main contractor, which since 2006 has been ULA.

The joint venture – the middleman in the engine deal - is Florida-based RD Amross. The firm’s role is an uncommon one. The Pentagon has rules limiting the use of middlemen in contracts, a safeguard against fraud and wasteful spending. But in this case, the arrangement was seen as temporary.

The partners originally planned to co-produce the engine in America for U.S. government space missions, according to a review in May by the Defense Department. That hasn’t happened. The engines proved to be cheaper to make in Russia, and Energomash had a ready supply of them.  

The Pentagon finds itself highly dependent on the Russian engines as a result, according to the Defense Department review. Through 2020, the U.S. government will rely on RD-180-powered Atlas V rockets for more than 56 percent of its space launches, the report said.

Amross and its five full-time employees occupy a small suite in a beige stucco building just off the white sands of Cocoa Beach, Florida. The building is home to doctors, a dentist and a hearing aid seller.

MISSION CRITICAL: In the U.S. Senator John McCain, centre, has sought information on the costs of Russian engines used in American Atlas V rockets. In Russia, Deputy Prime Minister Dmitry Rogozin, top, oversees space programs, while Yuri Kovalchuk, bottom, a long-standing ally of Putin, has had indirect influence. REUTERS/Grigory Dukor/Ints Kalnins/Alexander Zemlianichenko/Pool

Since 2011, the company has been run by U.S. space industry veteran William Parsons. A former Marine, Parsons worked at NASA for years, serving as director of the John F. Kennedy Space Center in nearby Cape Canaveral. Before joining RD Amross, he was vice president of strategic space initiatives at Lockheed Martin, co-owner of United Launch Alliance. Parsons declined to comment.

TOUGH QUESTIONS

Amross’s engine sales have been questioned over the years in Washington. Most recently, in a June 20 letter to Defense Department acquisitions chief Frank Kendall, McCain wrote that he had unspecified information indicating that “ULA — and ultimately the Air Force — buys the RD-180 for a price significantly above what RD Amross pays NPO Energomash.” As a result, “the U.S. taxpayer (is) essentially giving a Russian company a profit by perhaps more than 200 percent. Is this allegation accurate?”

McCain sought specifics. "For how much does NPO Energomash sell the RD-180 to RD Amross?” he wrote. “For how much does RD Amross subsequently sell the RD-180 to ULA? For how much does ULA sell the RD-180 to the Air Force?”

Despite the Pentagon’s silence, the documents examined by Reuters answer his first two questions.

RD Amross buys the engines from Energomash for $20.2 million each on average, according to Amross’s current contract with Energomash, dated June 5, 2014.

Amross adds $3.2 million to each engine, a 15 percent markup. It then sells them to ULA for $23.4 million, according to an amendment to Amross’s contract with ULA, dated Oct. 2, 2014.

In all, Amross will reap $93 million in mark-ups over the course of the deal. The $680 million contract calls for 29 engines to be delivered from this year through 2017.

The current arrangement follows an earlier, $303 million contract proposal that called for Amross to deliver 12 engines to ULA from 2011 to 2013.

VITAL PAYLOADS: Carrying a satellite for a U.S. meteorological program, a United Launch Alliance Atlas V rocket blasts off from Vandeberg Air Force Base in California in April 2014. REUTERS/Gene Blevins

“The bottom line is that the joint venture between the Russians and Americans is taking us to the cleaners.”

Charles Tiefer, University of Baltimore School of Law

In an August 2011 report, the Pentagon’s Defense Contract Audit Agency detailed the deal. It said that middleman Amross would pay $17.9 million per engine on average. Amross then planned to add on average $5.5 million in “profit” to the price of each engine – an extra 31 percent - before reselling them to ULA. The profit mark-ups totalled more than $66 million.

In a 67-page report, Pentagon auditors called the proposal “not acceptable for the negotiation of a fair and reasonable price.” They contested the $66 million profit “in its entirety, as unallowable excessive pass-through charges” under federal contracting law. The services Amross cited to justify the profit “constituted ‘no or negligible value,’” they concluded. The auditors also contested $14.4 million in overhead expenses.

The findings were extraordinarily blunt, said Charles Tiefer, a military contracting specialist and professor at the University of Baltimore School of Law, who reviewed the document for Reuters.

“The bottom line is that the joint venture between the Russians and Americans is taking us to the cleaners,” Tiefer said. He said he had reviewed Pentagon audits critical of Iraq War contracts, but those “didn't come anywhere near to how strongly negative” the Amross audit was.

ULA and RD Amross said they resolved the dispute to the Air Force’s satisfaction. The price was reduced, they said, but they wouldn’t put a dollar figure on the discount. The Air Force said the audit was taken into account in working out the contract. It wouldn’t discuss the price it paid ULA for engines under that deal or the current arrangement.

“ULA and the Government ultimately determined that the RD AMROSS contract price was fair and reasonable and there were no ‘unallowable excessive pass-through charges,’” ULA spokeswoman Jessica Rye said in a written statement.

In a letter to McCain last month, Defense Department acquisitions chief Kendall said Amross’s value in the deal included providing technical advice, logistics and “anomaly resolution.”

Reuters described its findings about Kovalchuk’s ties to Energomash to  Amross, ULA and the Air Force. The Air Force didn’t address the Kovalchuk connection. ULA said it is “not aware” of any involvement at Energomash by the Russian billionaire.

Amross referred questions to the joint venture’s American co-owner, the Pratt & Whitney Military Engines unit of United Technologies. A spokesman there, Matthew Bates, said Amross’s lawyers had looked into the Kovalchuk connection.

“We disagree with your assertion that ‘Kovalchuk has had a significant role in Energomash,’” Bates said in an email. The indirect stake uncovered by Reuters, Bates said by e-mail, was not a majority holding. What’s more, “these alleged connections were severed prior to the imposition of U.S. sanctions against Yuri Kovalchuk.” He didn’t address the role played by Kovalchuk’s brother as chairman of Energia, the company that runs Energomash.

Washington had warned it was considering sanctions on Russian officials. About two weeks before the sanctions were announced, Kovalchuk’s investment appeared to diminish. But it stayed in friendly hands.

Control of his indirect holding in Energia shifted to a pension fund run by a businessman named Yuri Shamalov. He is the son of longtime Putin associate Nikolai Shamalov,  a co-owner of a powerful bank run by Kovalchuk. The Shamalovs had no comment.

In June, Energomash and Amross finished up a new agreement to supply RD-180 engines to the Air Force program.ULA is paying $23.4 million per engine – the same price originally called for in the prior contract that caused all the wrangling.

Additional reporting by Maria Tsvetkova and Jason Bush in Moscow. Edited by Richard Woods and Michael Williams.

Putin’s allies channelled billions to oligarch who backed pro-Russian president of Ukraine

RED RIBBON: Then Ukrainian President Viktor Yanukovich (left) and Dmitry Firtash, one of Ukraine's richest men, in 2012, at the opening ceremony of a new sulphuric acid plant in Crimea. The friendship between the two men benefited both, as well as Moscow. REUTERS/Mykhailo Markiv

Part 5: Russian bank granted huge loans to Dmitry Firtash, whose business empire boomed under Viktor Yanukovich

Русский язык (Russian translation)

MOSCOW/KIEV – In Russia, powerful friends helped him make a fortune. In the United States, officials want him extradited and put behind bars. In Austria, where he is currently free on bail of $155 million, authorities have yet to decide what to do with him.

He is Dmitry Firtash, a former fireman and soldier. In little more than a decade, the Ukrainian went from obscurity to wealth and renown, largely by buying gas from Russia and selling it in his home country. His success was built on remarkable sweetheart deals brokered by associates of Russian leader Vladimir Putin, at immense cost to Russian taxpayers, a Reuters investigation shows.

Russian government records reviewed for this article reveal for the first time the terms of recent deals between Firtash and Russia’s Gazprom, a giant gas company majority owned by the state.

According to Russian customs documents detailing the trades, Gazprom sold more than 20 billion cubic metres of gas well below market prices to Firtash over the past four years – about four times more than the Russian government has publicly acknowledged. The price Firtash paid was so low, Reuters calculates, that companies he controlled made more than $3 billion on the arrangement.

Over the same time period, other documents show, bankers close to Putin granted Firtash credit lines of up to $11 billion. That credit helped Firtash, who backed pro-Russian Viktor Yanukovich’s successful 2010 bid to become Ukraine’s president, to buy a dominant position in the country’s chemical and fertiliser industry and expand his influence.  

The Firtash story is more than one man’s grab for riches. It demonstrates how Putin uses Russian state assets to create streams of cash for political allies, and how he exported this model to Ukraine in an attempt to dominate his neighbour, which he sees as vital to Russia’s strategic interests. With the help of Firtash, Yanukovich won power and went on to rule Ukraine for four years. The relationship had great geopolitical value for Putin: Yanukovich ended up steering the nation of more than 44 million away from the West’s orbit and towards Moscow’s until he was overthrown in February.

“Firtash has always been an intermediary,” said Viktor Chumak, chairman of the anti-corruption committee in the previous Ukrainian parliament. “He is a political person representing Russia’s interests in Ukraine.”

A spokesman for Putin rejected claims that Firtash acted on behalf of Russia. “Firtash is an independent businessman and he pursues his own interests, I don’t believe he represents anyone else’s interests,” said Dmitry Peskov.

The findings are the latest in a Reuters examination of how elites favoured by the Kremlin profit from the state in the Putin era. In the wild years after the fall of the Soviet Union, state assets were seized or bought cheaply by the well connected. Today, resources and cash flows from public enterprises are diverted to private individuals with links to Putin, whether in Russia or abroad.

Putin’s system of comrade capitalism has had huge costs for the ordinary people of Russia: By granting special cheap deals to Firtash, Gazprom missed out on about $2 billion in revenue it could have made by selling that gas at market prices, according to European gas price data collected by Reuters. Four industry analysts said that Gazprom could have sold the gas at substantially higher prices to other customers in Europe.

 At the same time, the citizens of both Russia and Ukraine have seen unelected oligarchs wield political influence.

Firtash, whose main company, Group DF, describes him as one of Ukraine’s leading entrepreneurs and philanthropists, was arrested in Austria on March 12 at the request of U.S. authorities. The Americans accuse him of bribery over a business deal in India unrelated to events examined in this article. Firtash denies those allegations and is currently free on bail.

Firtash imported the cheap Russian gas through a Cypriot company of which he is sole director, and a Swiss one set up by Group DF. He and Group DF declined to answer questions about  those two companies and their gas dealings. A spokesman said Firtash was not available to discuss his business operations, and that Group DF did not wish to comment on “any of the questions you put forth.”

The Kremlin spokesman Peskov said Putin has met Firtash but that they are not close acquaintances. He said Russia supplied gas at “lower prices” to Ukraine because Yanukovich had asked for it and Russia wanted to help Ukraine’s petrochemical industry. Peskov said the deals were arranged through Firtash because “the Ukrainian government asked for it to be that way.”

Yanukovich, who fled to Russia in February after mass demonstrations against his government, could not be reached for comment.

POWER: A Gazprom sign in front of Moscow’s White House, seat of the Russian prime minister. The Russian firm sold about four times more gas at below-market prices to Ukrainian Dmitry Firtash in 2012-2013 than Moscow has publicly acknowledged. The price was so low, Reuters calculates, that companies controlled by Firtash made more than $3 billion. REUTERS/Sergei Karpukhin

THE MIDDLEMAN

“Firtash has always been an intermediary. He is a political person representing Russia’s interests in Ukraine.”

Viktor Chumak, chairman of the anti-corruption committee in the previous Ukrainian parliament

From the moment he first became Russia’s president, Putin moved to take control of his country’s most valuable resource: natural gas. After assuming power in 2000, he replaced the management of Gazprom, put trusted allies in charge, and ensured the Russian state controlled more than half the shares.

The corporate behemoth now supplies about a third of Europe’s gas, generating vital revenue for Russia and giving Putin a powerful economic lever. “Gazprom is very much a tool of Russian foreign policy,” says Rem Korteweg, senior research fellow at the Centre for European Reform. Every major deal that Gazprom signs is approved by Putin, people in the energy industry say.

 Putin’s spokesman rejected such assertions: Gazprom, he said, “is a commercial, public company, which has international shareholders. It acts in the interests of its shareholders, which also include the Russian state.”

In normal times, Gazprom’s second biggest customer in Europe is Ukraine; Russian gas was piped directly across the border between the two countries until Russia cut off supplies earlier this year.

In the 2000s, though, Gazprom decided to sell gas not directly to Ukraine’s state gas company Naftogaz, but to intermediaries – in particular Firtash, an international gas dealer who had risen from humble origins.

Firtash grew up in west Ukraine, where his father worked in education and his mother in a sugar factory, according to an account Firtash gave during a meeting with the U.S. ambassador in Kiev in 2008. Both his parents disdained communism and lacked the contacts needed to get their son into university, he said.

He joined the army in 1986, then trained to be a fireman. When the Soviet Union collapsed, leading to Ukraine’s independence in 1991, Firtash found himself having to make a living in an uncertain world, according to his account to the ambassador. With his first wife, he set up a business in west Ukraine shipping canned goods to Uzbekistan, according to local media reports researched by the U.S. embassy.

A U.S. diplomatic cable, which summarised Firtash’s discussion with the ambassador, drily noted: “Due to his commodities business, (Firtash) became acquainted with several powerful business figures from the former Soviet Union.”

According to the cable, Firtash told the U.S. ambassador he had been forced to deal with suspected criminals because at that time it was impossible to do business in Ukraine cleanly. He said he had needed and received permission from a man named Semion Mogilevich to establish various businesses.  Mogilevich, an alleged boss of organised crime in eastern Europe, is  wanted by the U.S. Federal Bureau of Investigation for an alleged multi-million-dollar fraud in the 1990s involving a company headquartered in the United States. He was indicted in 2003, and described by the FBI in 2009 as having an “extensive international criminal network.”

Firtash has repeatedly denied having any close relationship with Mogilevich. Mogilevich could not be contacted for comment. He has previously denied any wrongdoing or any connection to the gas trade in Ukraine.

By 2002, a company called Eural Trans Gas, registered in Hungary, was transporting gas from Turkmenistan through Russia to Ukraine. Its ownership was unclear, but Firtash represented it. In July 2004, a new company, RosUkrEnergo, became the intermediary for gas deals between Russia and Ukraine. The owners of RUE were unknown at first, but it later emerged that nearly all of the company was owned by Firtash and Gazprom.

RUE bought gas cheaply and sold it on at a higher price in Ukraine and Europe. This arrangement guaranteed profits for RUE and was hugely controversial among Ukrainians who saw RUE as an unnecessary intermediary. Another U.S. diplomatic cable, from March 2009, described RUE as a “cash cow” and a “serious source of ... political patronage.” In a website posting, RUE said that in 2007 it sold nearly $10 billion worth of gas and had net income of $795 million.

After Yulia Tymoshenko, herself a former gas trader, became prime minister of Ukraine in 2008, she reacted to public anger about the gas trade and moved to cut Firtash and RUE out of the business. She struck her own gas deal with Putin in 2009.

By that time, Firtash was rich. In the country’s 2010 presidential election, Firtash, by his own admission, aided the pro-Russian Yanukovich. A U.S. diplomatic cable described Firtash as a “major financial backer” of Yanukovich.

“Firtash supported Yanukovich in various ways,” said Vadym Karasiov, an aide to Viktor Yuschenko, Ukraine’s president from 2005 to 2010, in an interview. Karasiov said the mogul used his influence in the media to promote Yanukovich. In April 2010, in the aftermath of the election, Karasiov told the Kiev Post: “Without Dmitry Firtash there wouldn’t have been a (Yanukovich) victory.”

With Yanukovich president, Tymoshenko stepped down as prime minister. Business associates of Firtash were appointed to influential positions in the new administration. He had allies in the corridors of power, and ambitious plans to expand his business empire and get back into the gas trade. His friends in Russia were happy to help him.

THE LOANS

Tucked away in Nicosia, Cyprus, a bundle of tattered papers wrapped in string records Russian credit agreements made to Firtash companies. The documents, reviewed by Reuters, detail a series of financing deals worth billions of dollars.

The deals were arranged by a Russian lender called Gazprombank. Despite its name, the bank is not controlled by Gazprom, which holds only a minority stake. It is a separate business, overseen by people linked to Putin. They include Yuri Kovalchuk, a banker who until March 2014 controlled an  investment firm that manages a majority stake in Gazprombank. (See “Kremlin links to Gazprombank.” For more on Kovalchuk, see Part 4 of this series.)

In a statement, Gazprombank said: “We do not receive any instructions from the Kremlin … The strategy of the bank is developed by its management board and approved by the board of directors. No other influence is possible.”

Asked whether Putin had any role in issuing the loans to Firtash companies, Kremlin  spokesman Peskov said: “Putin, as president, does not have anything to do with this.”

Gazprombank began lending money to Firtash companies soon after Yanukovich took power in Ukraine in February 2010.

In June that year, Firtash established a company called Ostchem Investments in Cyprus. A month later, Gazprombank registered a credit line to the company of $815 million, according to the Cyprus documents. In September, Ostchem Investments bought a 90 percent stake in the Stirol fertiliser plant in Ukraine. It was perfect synergy: Firtash knew the gas business, and natural gas is a major feedstock for making fertiliser.

Further loans and deals with Firtash companies followed.

Reuters found that by March 2011, Gazprombank had registered credit lines of up to $11.15 billion to Firtash companies. The companies may not have borrowed that whole sum, but the documents indicate that loans up to that amount were available, according to Cyprus lawyers.

In the space of seven months in 2011 alone, Firtash acquired control of two more fertiliser plants in Ukraine, Severodonetsk Azot and Rivne Azot. He also bought the Nika Tera sea port, through which fertiliser and other dry bulk goods are shipped. He acquired a lender called Nadra Bank and invested in the titanium processing industry.

Such was his expansion that Firtash became the fifth largest fertiliser producer in Europe. Being a large employer brought not just potential profits but also political clout, he boasted. “We have relations with MPs,” Firtash told Die Presse in Austria in May. “We are big employers in the regions that they represent. Entire cities live on our factories. Election candidates seek our support.”

“These special deals for Ostchem were not in the interest of Ukraine.”

Aliona Osmolovska, Naftogaz chief of press relations

When asked in 2011 where the money came from to pay for his acquisitions, Firtash was coy. At a press conference called to announce his purchase of the Severdonetsk plant, he declined to name his major lenders. “It’s a secret,” he told Ukrainian journalists.

But a Gazprombank manager told Reuters that the Russian bank had led a consortium of lenders which in 2011 agreed to lend about $7 billion to Firtash. The official said Gazprombank itself lent Firtash $2.2 billion, and that Firtash still owed the bank $2.08 billion. The official declined to name other lenders in the consortium.

A $2.2 billion loan was a big commitment for Gazprombank: It amounted to nearly a quarter of the bank’s total capital, the maximum loan allowed by Russian banking rules for any single client or group. Based on regulatory filings, the loan facility made Firtash the biggest single borrower from Gazprombank.

Reuters was unable to establish exactly how much in total the Gazprombank consortium lent to Firtash companies.

In a statement, Gazprombank said that “the aggregate amount of loans disbursed to Ostchem Group” was “several times lower” than $11 billion. “And all capital requirements and limitations of the Central Bank of Russia in respect of loans granted have always been complied with by Gazprombank, including loans to Ostchem Group,” the statement said.

The bank declined to give any further details, saying it had to protect client confidentiality. The central bank had no comment.

JUDO CONNECTIONS: Russian President Vladimir Putin shakes hands with the head of Russia's judo federation, Vasily Anisimov, during a meeting with members of the Olympic judo team in 2012. When Dmitry Firtash was arrested in Vienna earlier this year, Anisimov loaned the Ukrainian businessman $155 million for bail. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

GAS PROFITS

Firtash now had money, political connections and businesses that relied on large supplies of gas. What he needed next was fuel.

In January 2011, Firtash signed an unpublished agreement, seen by Reuters, with Gazprom to buy gas through a company called Ostchem Holding in Cyprus, where he is the sole director listed.

The gas deal was later extended to include sales to Ostchem Gas Trading AG in Switzerland. It was also agreed by Naftogaz, Ukraine’s state-owned gas firm, where Yanukovich had installed new senior management. Firtash needed Naftogaz’s sign-off because it controlled pipelines delivering gas and, until that point, had an exclusive deal to import gas from Gazprom.

Naftogaz’s decision to agree to the deal was an odd one. Not only did it mean Naftogaz would surrender its monopoly on Russian gas imports, but the deal could also potentially damage the state firm. Naftogaz had previously agreed with Gazprom to pay for a set amount of gas whether it could sell it in Ukraine or not. Firtash’s deal could leave the Ukrainian state firm buying gas it would struggle to sell.

Firtash’s return to importing gas became public knowledge after Yanukovich’s election victory. But the price he paid Moscow, and how much cheap gas he bought, remained unclear. An Ostchem spokesman told Reuters the price was “confidential information.”

Russian customs records seen by Reuters show that in 2012, Moscow sold the gas to Firtash for $230 per 1,000 cubic metres (the standard unit used in gas sales). In 2013 the average cost was $267 per unit. Those prices were at least one-third less than those paid by Ukraine’s Naftogaz.  

Ukrainian customs documents and corporate filings show that Firtash’s Ostchem companies in Cyprus and Switzerland resold the gas to his chemical plants in Ukraine for $430 per unit. The prices and volumes suggest that the two offshore Ostchem companies made an operating profit of approximately $3.7 billion in two years.

Naftogaz’s current management is highly critical of the way in which Gazprom favoured Firtash’s companies. Aliona Osmolovska, chief of press relations, said: “These special deals for Ostchem were not in the interest of Ukraine.”

The real loser in the deal, though, was Gazprom. The arrangement, which Putin described during a press conference as having been made with the “input of the Russian leadership,” meant Russia sold its gas to Firtash for at least $100 per unit less than it could have made in Western Europe, according to Emily Stromquist, head of Russian energy analysis at Eurasia Group, a political risk research firm.

In addition, the profits from the subsequent resale of the gas were all reaped offshore by companies that did not benefit the Russian taxpayer. Those profits in 2012 and 2013 would have meant an additional $2 billion for Gazprom, whose ultimate majority owners are Russia’s citizens.

Gazprom declined to comment on its sales to Firtash’s companies.

Putin’s spokesman Peskov said Naftogaz agreed to Firtash receiving gas at low prices because the deal was intended to help Ukraine’s petrochemical industry. Asked why the gas was sold to companies in Cyprus and Switzerland, Peskov said: “Putin doesn’t need to approve this action. These operations are technical and were made by Gazprom according to the structures which are always used by its Ukrainian partners.”

Neither of the two Firtash companies that bought gas from Russia publishes accounts. Firtash declined to comment on the firms or their results.

UNEASY STANDOFF

The new government in Ukraine alleges that Yanukovich had allowed corruption to flourish and stolen millions of dollars.  In the longer term, the new government says it wants to forge closer ties with the European Union and reduce its dependence on Russian gas.

In June, Moscow cut off supplies of gas to Kiev, claiming that it was owed billions of dollars by Ukraine’s state-owned Naftogaz. Late last month, the two countries struck a deal allowing supplies to resume, but the agreement runs only until March. Firtash retains large stocks of gas but has not imported new supplies since Yanukovich was ousted.

Firtash remains in Austria awaiting the outcome of extradition hearings. According to a U.S. indictment unsealed in April, he is suspected of a scheme to bribe Indian government officials to procure titanium. Two U.S. government officials said the American investigation into Firtash is continuing; they declined to give further details.

The Ukrainian oligarch has said the allegations are “without foundation” and has accused Washington of acting for "purely political reasons." He has hired an all-star legal defence team. It includes Lanny Davis, who helped President Bill Clinton weather a series of White House scandals in the 1990s.

In his time of trouble Firtash has not been deserted by the Russians. Since his arrest he has received another loan in order to pay his bail: $155 million from Vasily Anisimov, the billionaire who heads the Russian Judo Federation, the governing body in Russia of Putin’s beloved sport.

“I have known Mr. Firtash for a number of years, though he is neither my friend nor business partner,” Anisimov told Reuters in an email. “I confirm that I loaned 125 million euros to him. This was a purely business transaction.”

Additional reporting by Michele Kambas in Cyprus, Elizabeth Piper and Jason Bush in Moscow, Oleksandr Akymenko and Pavel Polityuk in Kiev, Jack Stubbs in London, Warren Strobel in Washington and Michele Martin in Berlin.

Edited by Richard Woods and Michael Williams


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How a 29-year-old Ukrainian tycoon made a killing on Russian gas

FAST RISER: Serhiy Kurchenko, a businessman from east Ukraine, expanded his interests hugely when the former Ukrainian president Viktor Yanukovich was in power. Among other assets, Kurchenko, pictured here in 2013, bought an oil refinery, a football team and stakes in two banks. REUTERS/Stringer

Part 6: Serhiy Kurchenko, who is suspected of acting on behalf of the former Moscow-backed president of Ukraine, gained $100 million on gas supplied at a preferential rate.

Русский язык (Russian translation)

KIEV – A young businessman accused of being a frontman for former Ukrainian president Viktor Yanukovich made $100 million or more from buying Russian gas at a preferential rate and selling it on at higher prices, according a former senior employee and a Reuters examination of official data.  

Serhiy Kurchenko, 29 years old and a self-declared billionaire, made the money by selling cheap gas supplied by companies run by Dmitry Firtash, a prominent Ukrainian oligarch. Firtash has long-standing business connections to Russia and his companies were able to buy gas cheaply from Gazprom, the giant gas company run by allies of Russian President Vladimir Putin.

Some Ukrainian politicians and gas industry experts, briefed on the transactions by Reuters, said they believe the deal was a way for Firtash to reward former president Yanukovich for political favours that had benefitted Firtash’s business empire. Profits from the arrangement were destined for Yanukovich, they allege.

“Everybody in Ukraine knows that he (Kurchenko) is the wallet to pay off Yanukovich,” said Viktor Chumak, a senior Ukrainian lawmaker and the former head of the parliament’s anti-corruption committee. Reuters was unable to confirm the purpose of the favourable deals or whether Kurchenko passed proceeds to Yanukovich.

The details of the gas deals are likely to add to the controversy surrounding Kurchenko. Ukrainian officials have been investigating both him and Yanukovich since earlier this year, though those inquiries have focused on deals involving petroleum products and banking, not the natural gas deals uncovered by Reuters. Both men fled Ukraine after Yanukovich’s overthrow in February and are now living in Russia.

In a series of articles, Reuters has examined how people favoured by the Kremlin have profited from Russia’s state spending and natural resources. This brand of capitalism extended to Ukraine, which Moscow has never really accepted as a fully independent state, and which Putin has tried to influence through gas supplies.

Kurchenko stands accused by the current Ukrainian government of systematically evading millions of dollars in tax with the collusion of officials in Yanukovich’s administration. Vitaly Yarema, general prosecutor of Ukraine, said Kurchenko was under investigation for allegedly failing to pay the state $130 million in tax and allegedly stealing $180 million from bank investors.

Ukrainian officials say Kurchenko was closely connected to Yanukovich, who was toppled over his attempts to align Ukraine with Russia rather than the European Union. The former president is himself accused by the current Ukrainian government of stealing millions of dollars from the state.

The Ukrainian secret service described Kurchenko in October as the “chief financial officer” of what has become known in Ukraine as “the family,” a term for associates of Yanukovich. In an interview this month, Arsen Avakov, Ukraine’s interior minister, told Reuters: “Kurchenko was simply a manager” for the Yanukovich family. “His biography was clean – simply because he was a young man – and that was why they put him as a front for the family.”

On March 24, the general prosecutor’s office of Ukraine announced an investigation into “the establishment of a criminal organisation” by Kurchenko, who it described as “close to the ‘family’ of former President of Ukraine Viktor Yanukovich.”

And on May 19, a statement from the Ministry of Internal Affairs accused Kurchenko of manipulating the fuel market with the support of “patrons,” including former government ministers. Avakov, the interior minister, told Reuters that Kurchenko was suspected of tax offences relating to oil deals. “This scheme is only possible when the president is covering everything (up), and closing his eyes. It is the Tsar’s business.”

MONEY FLOW: A worker turns a valve at a gas storage facility in Ukraine in May, 2014. Russia’s supply of gas at preferential prices to the Ukrainian oligarch Dmitry Firtash generated profits not just for him but also for the little-known company Lidergaz, which Ukrainian officials say was controlled by Serhiy Kurchenko. REUTERS/Gleb Garanich

“Yanukovich’s son Oleksandr made all the decisions. Kurchenko and Oleksandr Yanukovich operated as one group.”

Arsen Avakov, interior minister of Ukraine

Kurchenko did not respond to requests for comment. He has previously denied the allegations of tax-dodging and said he has no corrupt links to Yanukovich; he has said he is the victim of political persecution. “I am an honest Ukrainian businessman,” he said in a statement posted in March on the website of his company, Vetek Group.

Yanukovich did not respond to requests for comment. Firtash, whose business empire, Group DF, expanded rapidly when Yanukovich was in power, declined to comment.

FAST MONEY

Kurchenko began work at 16 and set up his own company three years later, according to his personal website. He has previously said that he went on to make money from property investments and importing oil products.

In 2012, 20 months after Yanukovich became president of Ukraine, Kurchenko became a public figure when the Ukraine version of Forbes ran an article about him. The magazine alleged Kurchenko secretly controlled various companies where the registered owners and directors had no significant involvement in the businesses.

 Kurchenko denied any wrongdoing. He went on to buy Forbes Ukraine, prompting the journalists who had investigated him to quit. Kurchenko also amassed other high-profile assets in his own name: Partly with funding from a state-owned bank, he bought the Metalist Kharkiv football team, an oil refinery in Odessa, and stakes in two banks.

Several people with knowledge of the Ukrainian gas industry, including one of Kurchenko’s former executives, told Reuters that Kurchenko also secretly controlled a little-known company called Lidergaz. That company profited from trading in discounted gas supplies originating from Moscow, according to several Ukrainian officials and gas traders as well as official gas transport data supplied to Reuters.

The individual listed in corporate registration documents as the owner of Lidergaz couldn’t be located by Reuters. There was no sign of the company at the dilapidated former factory in Kiev listed as Lidergaz’s headquarters when a reporter visited. An employee of a law firm that represented Lidergaz said they were unable to contact the company.

FATHER AND SON: Viktor Yanukovich was forced out as president in February amid mass protests against corruption and his plans to align Ukraine with Russia rather than the European Union. He is pictured here with his son Oleksandr in April 2010. Both are now believed to be in Russia. REUTERS/Stringer

“I have repeatedly stated that I barely know Serhiy Kurchenko.”

Oleksandr Yanukovich, elder son of Ukraine’s former president.

Avakov, the Ukrainian interior minister, said he was unaware of Lidergaz. But two senior Ukrainian gas officials, one in the current government and one in the previous administration, told Reuters that Kurchenko controlled Lidergaz. “He installed fake directors at Lidergaz,” said the former senior official. “He bought the gas from the Firtash companies and then sold it to the market.”

Those claims were supported by others familiar with the company, including a Kiev energy trader. This trader said he knew Kurchenko was behind Lidergaz because he dealt with Kurchenko’s aides when doing business with Lidergaz.

According to the former Kurchenko executive, Lidergaz acquired gas from companies run by Firtash, which had originally bought the gas at below-market rates from Russia. Lidergaz resold the gas at a profit inside Ukraine. “It started in 2012 and was finished in July 2013. This was all about a few big deals in which the money was made,” said the former executive.

According to the former executive, Kurchenko worked closely with associates of Yanukovich. Kurchenko’s staff would receive their week’s instructions by text message on Sunday evenings after a weekly meeting between Kurchenko and a close aide to the former president, he said. The former executive said Kurchenko’s speciality was organising opaque commodity deals, executed through multiple transactions that were settled with large amounts of untraceable cash. This person added that he did not witness any specific payments to Yanukovich or anyone else.

As Reuters reported last month, Firtash had exclusive access to specially discounted gas supplies from Moscow. He imported it for chemical companies he managed in Ukraine. Official gas transport data reviewed by Reuters show that in 2012 and 2013, Lidergaz bought 3.2 billion cubic metres of gas from Firtash’s chemical companies.

A review of corporate filings and court cases concerning gas sales shows that Lidergaz paid $397, before sales tax, for each 1,000 cubic metres of the gas, the standard unit. That was more than $30 per unit below the market price.

According to the former Kurchenko executive and senior Ukrainian officials, Lidergaz resold at market prices all the gas it bought from Firtash’s chemical plants, thereby making a profit. Some of the gas was bought by a subsidiary of the state-owned gas company, Naftogaz. The subsidiary said in a press announcement that it paid Lidergaz the market price of $430 per unit, before sales tax.

With those prices, Lidergaz stood to make a $100 million gain.

In light of the Reuters findings about the gas deals, Naftogaz said it would examine transactions involving Lidergaz.

COMPANY BASE: The registered headquarters of Lidergaz is a dilapidated building in Kiev. When a Reuters reporter called, no one from the company was present. The company could not be contacted for comment. REUTERS/Valentyn Ogirenko

The former Kurchenko executive said Lidergaz made even more money because Kurchenko exploited the tax system. He charged sales tax on the gas he sold, but failed to pass the tax on to the government, the former executive said. The alleged theft of tax revenues is a central part of Ukrainian investigations into Kurchenko. “He never paid customs duties. He never paid VAT (sales tax),” said Ihor Bilous, the head of the Ukrainian tax service.

Kurchenko has denied the tax allegations.

“FAKE PEOPLE”

The gas data analysed by Reuters expose a curiosity: The chemical companies run by Firtash are large consumers of gas, yet they sold gas to Lidergaz for less than they had bought it themselves. Firtash declined to answer questions on the issue and Kurchenko did not respond to requests for comment.

Interior Minister Avakov said he believed that Yanukovich’s elder son was a powerful force behind Kurchenko. “Yanukovich’s son Oleksandr made all the decisions. Kurchenko and Oleksandr Yanukovich operated as one group,” said Avakov.

Viktor Yanukovich did not respond to requests for comment. His elder son Oleksandr, who is also believed to be in Russia, told Reuters by email: “I have repeatedly stated that I barely know Serhiy Kurchenko.” He added that he and his managers did not have any personal or business relations with Kurchenko.

In an interview with Forbes Ukraine magazine last year, Kurchenko denied knowing Oleksandr Yanukovich, and said his businesses did not need connections in the Yanukovich government.

In March, Firtash was arrested in Austria at the request of U.S. authorities investigating him for alleged bribery in business deals in India. Currently free on bail of 125 million euros ($155 million), Firtash strongly denies any wrongdoing. He declined to comment on questions from Reuters about his gas deals.

Additional reporting by Roman Anin and Elizabeth Piper in Moscow, and Oleksandr Akymenko in Kiev. Edited by Richard Woods.


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