A detained billionaire who made a fortune as a middleman in Russia’s murky gas trade with Ukraine may hold the key for U.S. lawmakers seeking harsher sanctions against President Vladimir Putin’s inner circle.
Ukrainian Dmitry Firtash, arrested in Vienna this month on an American warrant for bribery and other charges, may hand over a treasure trove of information about deals involving Russian state gas exporter OAO Gazprom (GAZP) that the U.S. would consider corrupt, said Mikhail Korchemkin, a former analyst for the Soviet Union’s Gas Ministry in Moscow and founder of Malvern, Pennsylvania-based East European Gas Analysis.
After Putin seized Ukraine’s southern Crimea region, a U.S. Senate panel approved a bill on emergency funding for the country that would widen the scope of sanctions to include any Russian involved in “significant” corruption.
Full Coverage of the Crisis in Ukraine:
“This law would enable the U.S. to go after any member of Putin’s entourage,” Masha Lipman, an analyst at the Carnegie Moscow Center, said by phone. “The point is to deepen the fractures within the Russian elite. The idea is to weaken Putin so he can be contained.”
President Barack Obama last week expanded financial sanctions to 20 more Russian officials, billionaires and a bank, including brothers Arkady and Boris Rotenberg, who have joint investments with Firtash in Ukraine and Russia. The Rotenbergs’ companies received $7 billion of contracts for the Sochi Winter Olympics and are major suppliers to Gazprom.
Firtash, 48, built his fortune as a broker of Russia’s gas sales to Ukraine, one of Gazprom’s biggest export markets. He and a partner owned half of RosUkrEnergo, which was founded in 2004 and emerged as Ukraine’s sole gas importer in 2006 to 2009, between price disputes with Russia that led to supply halts and shortages across Europe.
Gazprom oversaw the other half of RosUkrEnergo, which Ukraine’s security service in 2005 said may be indirectly controlled by Semion Mogilevich, an organized crime suspect on the U.S. Federal Bureau of Investigation’s most-wanted list. Firtash has repeatedly denied any link between Mogilevich and RosUkrEnergo. A lawyer for Mogilevich, who lives in Moscow, said his client has never been in business with Firtash.
Read About Other Individuals Targeted by U.S. Sanctions
Still, the former U.S. ambassador in Kiev, William Taylor, said Firtash himself told him that he needed Mogilevich’s permission to get into the lucrative gas business with Gazprom, according to a secret cable to the Central Intelligence Agency that was published by Wikileaks and dated Dec. 10, 2008.
“Firtash may know whether Ukrainian officials and managers of Gazprom and Gazprombank had personal economic interests in these transactions,” former Gazprom Deputy Chairman Alexander Ryazanov said in an interview in Moscow.
Gazprom’s spokesman, Sergei Kupriyanov, said the company sees no negative consequences from the possible extradition of Firtash to the U.S.
Graphic: Mapping the Conflict in Ukraine
For years, Gazprom sold gas to Ukraine at lower than western European rates as a gesture of goodwill to Russia’s fellow former Soviet state. The RosUkrEnergo deals allowed the company to sell cheap gas from Turkmenistan at much higher rates in Europe, which helped subsidize Ukraine’s domestic market. Gazprom investors criticized the scheme at the time for introducing an unnecessary player in transactions that the Russian monopoly could perform itself.
The twin pillars of Putin’s economy, Gazprom, the world’s largest gas producer, and state oil champion OAO Rosneft (ROSN), are already both potential targets of sanctions. Gazprom Chief Executive Officer Alexey Miller and Rosneft CEO Igor Sechin may be among officials banned from the European Union, Germany’s Bild newspaper reported March 15, a move the bloc has yet to carry out in two rounds of sanctions.
Obama signed a separate order on March 20 authorizing potential penalties on Russian industries such as energy, finance, mining and defense. Bank Rossiya, a St. Petersburg lender founded by three Putin associates in 1990, was put on the sanctions list last for being, as the Treasury Department said, “the personal bank for senior officials.”
Graphic: What Crimea Is Costing Putin
Leaders of the U.S., the European Union, China, Japan and others meet in The Hague today, with Obama seeking to mobilize opposition to Putin’s incursion into Crimea.
Russian anti-corruption activist and opposition leader Alexey Navalny, who’s under house arrest in Moscow, said March 20 that Miller and Sechin, as longtime Putin allies with key positions in his power structure, should be included in any regime of penalties put together by the West.
“Western nations could deliver a serious blow to the luxurious lifestyle enjoyed by the Kremlin’s cronies who shuttle between Russia and the West,” Navalny said in a commentary in the New York Times. (NYT) “This means freezing the oligarchs’ financial assets and seizing their property.”
Miller, 52, and Sechin, 53, both worked for Putin in the St. Petersburg mayor’s office in the 1990s. Miller, CEO since 2001, declined to comment on the possibility of his inclusion on the blacklist, according to Kupriyanov. Sechin, a former deputy premier who’s overseen Rosneft since 2004 as chairman, then CEO, denounced all Western “threats and blackmail,” according to an e-mailed comment.
“As far as the loyal elite is concerned, sanctions have always led to a consolidation of forces to counter pressure from outside,” said Sechin, who spearheaded Rosneft’s takeover of Yukos Oil Co. to become Russia’s largest crude producer after the 2003 jailing of Yukos owner Mikhail Khodorkovsky.
Excluding Miller and Sechin leaves “headroom for additional sanctions,” said Cliff Kupchan, an analyst at Eurasia Group in New York. So far, the U.S. sanctions have been “targeted,” unlike the sweeping penalties against Iran over its nuclear program that are designed to sever “vast swathes of the economy” from the West, Kupchan said in a research note.
The U.S. law, if passed by both houses of Congress and signed by Obama, would authorize the president to impose sanctions against Russian officials or their associates or family members involved in the “expropriation of private or public assets for personal gain, corruption related to government contracts or the extraction of natural resources, bribery, or the facilitation or transfer of the proceeds of corruption to foreign jurisdictions.”
Firtash, worth $2.3 billion according to Kiev-based Korrespondent magazine, was arrested March 14 on suspicion of bribery and criminal conspiracy, according to an Austrian police statement. The charges are the result of several years of investigation by the FBI and aren’t “related to recent events in Ukraine,” the U.S. Department of Justice said.
Firtash, who owns titanium assets in Crimea, paid a record 125 million-euro ($172 million) bail on March 20 to win release during extradition hearings. He criticized his arrest as a “purely political” act.
The case involves allegations of bribes paid by a Swiss company controlled by Firtash, Bothli, to obtain licenses to mine titanium ore in Andhra Pradesh with a state-run Indian company and build plants to produce titanium sponge with Boeing Co. (BA) in India, according to two people familiar with the investigation who asked not to be identified.
Boeing agreed in 2006 to conduct a feasibility study into the project with Bothli and then decided not to pursue it, the Chicago-based company said in an e-mailed response to questions. Firtash’s point man for the project, Suren Gevorgyan, said Bothli never paid a bribe to get permits because India was eager to receive Boeing’s planned investment.
The charges seem designed to get Firtash inside the U.S. and persuade him to cut a deal for information about Gazprom and people close to Putin, Ariel Cohen, senior fellow at the Heritage Foundation in Washington, said by phone.
“Firtash was very deeply involved in the fine print of Gazprom’s dealings in Ukraine, in the financial transactions,” said Korchemkin of East European Gas Analysis. “If Firtash strikes a deal with the FBI and starts to give testimony it could threaten severe consequences for Gazprom managers and the company itself.”
Any disclosure that shows Gazprom managers causing losses to U.S. investors, who hold more than half of the company’s depositary receipts, could lead to sanctions, major fines and lawsuits, Korchemkin said. Putin’s political protege, Prime Minister Dmitry Medvedev, was Gazprom’s chairman in 2002-2008. Medvedev’s spokeswoman, Natalia Timakova, declined to comment on the possibility that the premier may face sanctions.
“These sanctions are designed to touch important people close to the Kremlin and have a geopolitical impact rather than a direct effect on earnings at other banks,” said Hadrien de Belle, an analyst at Keefe Bruyette & Woods, a New-York based financial services company. “This has to be perceived as going after the financial conduits for the wealth of the targets.”
Two other billionaires close to Putin, former Gazprom adviser Alisher Usmanov and Roman Abramovich, both of whom are shareholders of London soccer clubs, are prime candidates for sanctions, said Navalny, the opposition leader.
The bulk of Abramovich’s $14 billion wealth, according to the Bloomberg Billionaire’s Index, came from the sale of OAO Sibneft, the oil company he acquired for about $100 million in 1996. He sold it to Gazprom for $13 billion a decade later. Abramovich’s spokesman, John Mann, declined to comment.
Usmanov, 60, is Russia’s richest man, with a fortune of $17.4 billion. He cut his U.S. stock holdings this year, selling his shares in Apple Inc. and reducing his interest in Facebook Inc., according to Ivan Streshinskiy, head of Usmanov’s asset-management company USM Advisors LLC.
Sanctions are “counterproductive” for all parties involved because the global economy is interconnected, Usmanov told reporters in Moscow on March 20. He didn’t respond to requests for comment sent to his representatives.
“Everyone has to decide whether they want to bring back their assets to Russia and stay within sealed borders,” Lipman of the Carnegie Center said. “This is a bleak prospect for many people.”