Putin’s Friends Reap Billions in Deals as Economy Teeters

The new prize from the Kremlin arrived in eastern Siberia.

On the plains near the city of Yakutsk, trumpets sounded as President Vladimir Putin signed his name in white ink on a stretch of black pipeline, the symbolic starting point of a $400 billion natural gas link to the Far East.

It was little more than show. The Power of Siberia pipeline will actually wind several hundred miles to the south.

What was real was the money flowing to Arkady Rotenberg, a member of Putin’s tightening inner circle and a boyhood friend. Rotenberg-affiliated companies were paid about 94 million rubles ($1.7 million) to organize the September ceremony, corporate filings show.

Having grown rich on government contracts during the boom in Putin’s Russia, friends of the president are benefiting anew as times grow tough. Lucrative orders keep rolling in for the favored few even as western sanctions and a collapse in oil prices push the economy to the brink.

The development has polarized Russia’s oligarchy and pitted Putin’s small circle against less well-connected rivals in a battle for money and privilege.

State Contracts

Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko -- both targeted by U.S. sanctions for their ties to the president -- are landing a growing amount of state contracts. Together, they have won at least 309 billion rubles of work since U.S. sanctions were imposed in March, filings show. That figure -- which works out to about $8.1 billion at the average exchange rate over the period -- is 12 percent more than they received in all of 2013.

A Rotenberg-affiliated company is also about to secure a 228-billion-ruble order to build a bridge to Crimea, which Russia annexed in March, according to a high-ranking government official, who spoke on the condition of anonymity because the contract hasn’t been officially awarded.

The contract totals are based on a review of hundreds of documents made public on the government portal for state tenders and the SPARK corporate database, as well as on individual company websites in Russia.

In all, companies linked to Rotenberg and Timchenko have received orders since March that are equivalent to more than a fifth of what the government spent on contracts in the first nine months of the year.

‘Pie Shrinking’

There’s more to come. Rotenberg and Timchenko, both 62, stand to gain most from the 770-billion-ruble Power of Siberia pipeline as the main contractors to OAO Gazprom, the energy company Putin has built into an instrument of state-sponsored capitalism. Gazprom declined to comment on who will receive the pipeline contracts.

Their boon is coming at the expense of other oligarchs as the weak economy pressures Putin to reduce public spending.

“Not only is the pie shrinking more rapidly than originally anticipated, the political imperative of preserving some people’s slices means thinner slivers for everyone else,” said Mark Galeotti, a Russia expert and professor at New York University.

Executives who are used to prospering from government ties complain privately they are being elbowed aside. One Russian billionaire said Rotenberg and Timchenko have all but cornered the market in government contracts. He spoke on the condition of anonymity to avoid jeopardizing his companies’ chances of winning business.

‘Personal Bank’

With Russian companies cut off from international financing, winners and losers are starting to emerge. In July, the government stripped Alfa Bank, controlled by billionaires Mikhail Fridman, German Khan and Alexey Kuzmichev, of its exclusive contract to service the country’s wholesale electricity market. That business is worth an estimated 4 billion rubles a year.

Instead the Market Council, an industry regulator, shifted the business to OAO Bank Rossiya, which the Obama administration has called the “personal bank” of Putin’s inner circle. Bank Rossiya, also a target of U.S. sanctions, is controlled by Yury Kovalchuk, another Putin associate who was singled out by the U.S.

Bank Rossiya, based in St. Petersburg, stronghold of Putin’s youth, declined to comment.

State contracts aren’t the only source of government money. Igor Sechin and Vladimir Yakunin, who’ve known Putin since his days in the St. Petersburg mayor’s office, have sought tens of billions of dollars in aid for the state companies they command, OAO Rosneft, the country’s largest oil producer, and OAO Russian Railways. Both companies have turned to the $80 billion Wellbeing Fund, which was designed to safeguard the nation’s pension system. Rosneft and Russian Railways say helping to finance their investment programs will benefit the broader economy.

Fair Contracts

Contracts won by companies either controlled or partly owned by Timchenko were obtained fairly through a competitive process, said Anton Kurevin, a spokesman for Volga Group, which manages the businessman’s holdings.

Rotenberg told Interfax news service in October that his friendship with Putin didn’t affect his business “in any way.” He also said he hoped to build Power of Siberia. A spokesman for Rotenberg said there was nothing to add to the Interfax interview.

Putin has signaled he’ll continue to support companies and industries targeted by sanctions, and Dmitry Peskov, a spokesman for the president, said all contracts are awarded fairly.

‘Tender System’

“There is a tender system in place,” Peskov said. “No one just hands them these contracts by some order.”

While Putin’s allies prosper, some beyond his circle are losing out. A Moscow court on Nov. 14 extended by three months the house arrest of billionaire Vladimir Evtushenkov, on suspicion of money laundering, as authorities nationalize his OAO Bashneft oil company. Evtushenkov has said he’s innocent.

Evtushenkov, 66, is the richest Russian to be prosecuted since former Yukos Oil Co. owner Mikhail Khodorkovsky. Khodorkovsky spent a decade in jail as the state dismantled Yukos and Sechin’s Rosneft acquired the bulk of its best assets.

Khodorkovsky, who now lives in Switzerland, said on his website that he was “absolutely sure” Evtushenkov was targeted for refusing to sell Bashneft to Sechin. Sechin has denied having an interest in Bashneft or playing a role in the case against Evtushenkov.

‘Monopolizing Rents’

“Putin has been masterful at distributing the rents to all the relevant people, but now he’s monopolizing all the rents,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.

Aslund advised Putin’s predecessor, Boris Yeltsin, when the government handed the crown jewels of the Soviet economy to a handful of tycoons, including Khodorkovsky.

“Under Yeltsin, it was an oligarchy, but it was balanced among big groups,” Aslund said. “Now, Putin just squeezes them out.”

For the connected, the money is still flowing. Rotenberg’s SMP Bank, which is barred from U.S. and European markets, in April got a 10-year state loan of about 100 billion rubles at a rate of 0.51 percent to rescue another lender, Mosoblbank, according to two people familiar with the matter. SMP said by e-mail that it’s been tasked with cutting costs at Mosoblbank and returning the lender to profitability.

‘Huge Deal’

That loan was “a huge deal” for SMP because long-term financing at less than 1 percent is “impossible” to get in Russia, Sovlink analyst Olga Belenkaya said.

In 2012, when economic times were good, Russia passed a law requiring tenders to be made public. That improved transparency but also prompted connected businessmen to join forces to keep challengers away.

“The cartels are breeding because it’s better for contractors bidding for state tenders to cooperate than face free competition,” said Irina Kuznetsova, who helped draft the 2012 law.

The tally of contracts calculated by Bloomberg doesn’t include one for 134 billion rubles awarded by Russian Railways, which was won by a consortium that includes Timchenko-affiliated SK Most. There is no breakdown of how the consortium members are dividing it up the work or the profit.

Rotenberg said in the Interfax interview that sanctions were having a “negligible” effect on him economically because his businesses are geared toward the domestic market. Still, Rotenberg, who’s had luxury properties in Italy frozen, said the travel bans were taking a psychological toll.

Timchenko, who owns a home on Lake Geneva, echoed similar sentiments in an August interview with the news service TASS, saying it was unfair to be barred from seeing family members and his beloved pet Labrador in Europe.

‘Disguised Hostility’

Alexey Navalny, the anti-corruption blogger and opposition leader, said Putin’s refusal to change course over Ukraine and end Russia’s international isolation has created a disguised hostility among the elite. Navalny, who has been under house arrest on fraud charges since February, said with financial means dwindling, it will be harder for Putin to maintain the loyalty of even his closest associates.

Vladimir Rimsky, who studies corruption at the Indem research group in Moscow, said there’s little evidence that will happen soon.

“It’s in the interests of both Putin and the people close to him to continue this policy of support,” Rimsky said. “For them, the crisis isn’t something terrible, because they control all the resources.”

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