Russia's Latest Matryoshka-Doll Corruption Scandal

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website
Read More.
a | A

President Vladimir Putin's fresh anti-corruption drive, possibly aimed at hijacking the opposition's political agenda, has opened a huge can of worms.

First, Putin fired his defense minister, Anatoly Serdyukov, and large-scale theft was allegedly uncovered in the Glonass navigation-satellite program and the Regional Development Ministry. Some commentators quickly decided this was mere window dressing to counter the corruption-fighting crusade of popular blogger Alexey Navalny, who in October received the most votes in an Internet-based election to the anti-Putin opposition's Coordinating Council.

“Navalny's activity irritated the government, and if an initiative is seen as threatening, one needs to take it over,” Coordinating Council member Andrei Piontkovsky told the newspaper Noviye Izvestia. “I think the ruling elite has decided to ride the corruption issue so that no one could play that field without an official sanction."

When the Russian repressive machine really gets going, it's not easy to slow it down. On Nov. 20, police searched the apartments of investor Konstantin Malofeev and his erstwhile business partner, Alexander Provotorov, who is now head of  the state-controlled communications behemoth OAO Rostelecom.

The holding company controls all kinds of valuable assets, from old-fashioned long-distance operators to mobile and Internet providers. It also receives the juiciest government orders when it comes to telecommunications infrastructure. This year, for example, it was on the receiving end of a 16 billion-ruble ($533 million) contract for web cameras, networks and servers needed to broadcast the March 2012 presidential election from every polling station in Russia in real time. Rostelecom filled the rush order, and millions of Russians logged on to watch the unprecedented show. The government-controlled company is still stuck with the cameras, which no one now needs.

In the first nine months of 2012, Rostelecom posted net income of about $1 billion on revenue of about $6.7 billion. Its market value was about $11 billion on Nov. 20, and it was one of Russia's biggest cash cows. No wonder it has always been desirable and the object of fierce wars for control over its cash flow.

In 2008, I happened to work for a financial group, KIT Finance, which had used leverage to accumulate 40 percent of Rostelecom stock in hopes of cashing in on a planned restructuring of state-owned telecom assets. The trade went bad when Lehman Brothers Holdings Inc. failed, stocks plummeted and KIT Finance could not meet margin calls. The restructuring went ahead later, with various groups vying for control of Rostelecom and pushing different scenarios of the reorganization of Russia's telecom industry.

Malofeev, a colorful character who bankrolls a host of Russian Orthodox causes and runs an organization that professes to fight child pornography on the Internet, succeeded in becoming Rostelecom's biggest minority shareholder. His investment fund, Marshall Capital, is accused of using a shell company to accumulate almost 10 percent of the company's stock. In 2010, Provotorov, who once was head of Marshall Capital, became chief executive officer of Rostelecom.

This has long irritated Leonid Reiman, a former telecommunications minister and a serious player in the industry even while he worked for the government. Reiman has claimed that Malofeev traded on inside information while buying up Rostelecom stock.

Last year, a London court froze Malofeev's holdings in Rostelecom after a state-owned Russian bank, VTB, claimed he had defrauded it.

This is a story that Navalny has used in his crusade. It is described in a report by Navalny's Foundation for Fighting Corruption published jointly with the Henry Jackson Society. In 2007, VTB granted a loan of $225 million to a company called RAP to buy six Russian dairy farms from a company called Nutritek Group. RAP defaulted on the loan in 2009, and VTB now claimed both companies were controlled by Malofeev.

“It is apparent that there were many failures on the bank’s part, leading the Honorable Justice Arnold of the High Court of Justice, Chancery Division in London to note in a November 2011 ruling that, 'It is not clear from the evidence presently available what, if any, due diligence was carried out by or on behalf of either VTB Moscow or VTB to verify the assertions' made by the parties to the deal,” the report says.

The searches and interrogations of Malofeev and Provotorov were part of a criminal investigation of the same case, based on a VTB complaint.

VTB is now a partner in one of Reiman's telecommunications investment funds, called Alternative Capital Investments.

Malofeev told the daily Kommersant that "this is a campaign... intended by certain forces to put pressure on the head of the telecommunications company," referring to Rostelecom.

Putin's press secretary, Dmitry Peskov, was quick to deny that the searches in Malofeev's and Provotorov's apartments were part of any Kremlin campaign. “The work of law-enforcement agencies has nothing to do with the work of the president and the government,” he said. “These are different dimensions."

Many commentators find this hard to believe. The criminal investigation in the RAP loan case was officially opened last year, but until Nov. 20 it appeared just to sit there without anything happening. “The case has been around for a long time; it's considered a classic of Russian corruption,” Alexander Razuvaev, head of analysis for the investment firm Alpari, was quoted as saying. “Now this has all started unraveling. Better late than never.”

Navalny, too, welcomed the new developments, albeit somewhat sarcastically. “If, by some miracle, someone decided to unearth all the VTB loans that were handed out for kickbacks and later stolen, that is just great,” he wrote on his blog.

The sarcasm is somewhat justified: So far, every corruption investigation in the recent campaign has seemed to benefit some powerful official or clan. “Usually Putin acts as arbiter in the squabbles between the groups that surround him, and here he has just let them attack each other, scare and squeeze each other,” Georgy Satarov, a former Kremlin adviser and now head of the foundation Indem, told Kommersant FM radio.

Putin may have been right to do that. His rating has been at a record low this fall, but now it is starting to rebound, according to an article in RBC Daily newspaper, citing sociological data privately commissioned by the Kremlin. Public data are yet to be released. And even if individual investigations do nothing to reform Russia's deeply corrupt state capitalism, they will help Putin seize back the initiative from his opponents and refresh the facade of his 12-year rule.

(Leonid Bershidsky, an editor and novelist, is the Moscow and Kiev correspondent for World View. The opinions expressed are his own.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author of this story:
Leonid Bershidsky at

To contact the editor responsible for this story:
Katy Roberts at