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The kleptocracy of Vladimir Putin

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Photo: tiger_days/flickr

More than one critic has noted that Russia doesn't manufacture anything the world wants (a knock that now can be laid against Canada, especially since the dramatic fall of Blackberry and the bankruptcy of Nortel).

Think about it: what product (or brand name) does Russia produce which people covet? Cars, smartphones, wine, airplanes, beer, other technological or Internet innovations -- nothing comes to mind.

In fact, as the world watches Russian president Vladimir Putin make a lunge for the Ukraine, his imperialistic ambitions are effectively obscuring whether the Russian economy he presides over functions that well. An economy that's looking rather precarious given that it's been stoked by oil for years -- and oil prices remain flat. Now sanctions are poised to take a toll. Currently, Russia is the world's ninth-largest economy, despite sitting on vast resources and having a population of 143 million people: its GDP per capita ranks 50th, at less than US$15,000 per annum (Canada is 10th with US$52,000 by comparison).

One person with first-hand experience with the way Putin runs Russia's economy is the American businessman Bill Browder. I met Browder in London in February to film a story about him for Global TV's current affairs show 16 x 9. At age 50, Browder is a multi-millionaire who runs an asset management company called Hermitage Capital Management from a warren of offices in one of London's tonier neighborhoods.

Browder's story lends insight into the Russian economy because it suggests that Putin manages a deeply corrupt kleptocracy -- an economy run by his pals who steal whatever they can. A kleptocracy that's allowed Putin to profit personally: indeed, media stories have recently emerged about a renewed effort to search for Putin's personal fortune, which may be hidden in offshore bank accounts and could amount to tens of billions.

Browder's story is fascinating. First of all, he's the grandson of Earl Browder, arguably the most successful leader the Communist Party USA ever had. Earl led the party from 1930 until he was kicked out of it in 1945 for trying to disband the party on the grounds that Soviet-styled socialism and capitalism could co-exist peaceably (a rather naïve notion, to be sure).

It was because of his grandfather and father's left-wing beliefs that led Bill Browder to decide, as a teenager, to become a died-in-the-wool capitalist. He went to Stanford's business school and upon graduating with an MBA, found himself working in London at the investment firm of Salomon Brothers.

This was the early 1990s and the former Soviet bloc was trying to revert to free market economies. Browder soon got work helping Eastern European governments privatize their economies. He realized he could make a lot of money doing this, given that the state assets were usually be sold for a song. Eventually he raised money on Wall Street and set up a fund to invest in under-valued Russian companies. And got spectacularly rich doing so.

Indeed, by 2005, Hermitage was the largest private fund in Russia, with more than US$4.5 billion in assets.

But Browder was not simply a carpetbagger taking advantage of Russian naïveté. For one thing, he soon learned that once state assets were privatized, the new managers had a propensity to steal the profits for themselves. So his investments in Russian firms came with the caveat of ensuring they were run corruption-free. To this end, if he found the management wanting, he exposed their misdeeds to the media. Indeed, Browder became convinced most of the so-called Russian oligarchs, the businessmen who took over the former state assets after the collapse of socialism, were crooks, including Mikhail Khodorkovsky, who ran the giant firm Yukos.

Yet Browder's anti-corruption campaign eventually ran into an immoveable force -- that of Vladimir Putin. When Putin first came to power in 2000, Browder was a big fan of the former KGB agent, largely because Putin went after the oligarchs. In Putin, Browder saw a man after his own heart -- an anti-corruption crusader.

But Browder had misunderstood Putin's real intentions. This came into focus in 2005 when Browder flew into Moscow one day (where he lived) and was unexpectedly denied entry into the country. Browder was stunned, to say the least, and tried to find out why. The answer, as it turned out, would take years and a few murders to finally crystallize.

In 2007, the Moscow offices of Hermitage and of its lawyers were raided by the tax police. The officers grabbed the investment fund's records. Hermitage soon surmised the police were planning to use the records to steal their money they had wrapped up in Russian companies. They pulled out their investments before this could happen.

Meanwhile, Browder had hired a young Russian tax lawyer, Sergei Magnitsky, to investigate why Hermitage was targeted. One apparent reason was because Browder was exposing too many crooks at the highest echelons of the Russian economy. Moreover, Magnitsky eventually uncovered a sophisticated crime ring made up Russian tax police, high-ranking members of the government's revenue ministry, and organized crime figures, all of whom were protected by judges and other top officials. He discovered this ring used Hermitage's records to steal US$230 million from the Russian government by claiming tax monies Hermitage had paid in the past should now be returned to this group of criminals.

In the fall of 2008, Magnitsky was suddenly arrested, after testifying against some of the crooked tax officials. He was held in pre-trial detention for 358 days where he was starved, denied medical treatment and then eventually beaten to death. He died on November 16, 2009. This was one of almost half a dozen murders or mysterious deaths associated with the $230-million theft.

After Magnitsky's death, Browder published the details of who was responsible for stealing the $230 million and killing the lawyer, expecting Putin and the Russian government to arrest the culprits. Instead, the Russian government went after Browder and Magnistky, charging them both with fraud -- although Magnitsky was in his grave (Browder had meanwhile moved his operation to London).

By then it was clear what Putin's real agenda was: he had gone after the oligarchs in the early 2000s not because he was an anti-corruption crusader, but because the oligarchs were not his group of crooks. Once he drove the oligarchs from Russia, he installed his circle of friends in the senior management positions of the corporations the oligarchs were once running. And there they have been able to plunder at will.

This was most visibly seen with the Sochi winter Olympics, where the thievery of Putin's pals reached unparalleled heights. As documented by Boris Nemtsov, one of Putin's political opponents, the cost of the Olympics reached a staggering US$53 billion. In a report produced by Nemtsov last winter, he documented how this sum was still $10 billion more than the most expensive games -- which was the Beijing Olympics (a summer Olympics no less). In 2007, Putin had said the Sochi games would cost $12 billion. "Hence, we can draw an important conclusion," says Nemtsov's report. "The … cost of the Sochi Olympics is an anomaly and can only be explained by banal thievery, corruption, embezzlement, and the complete lack of professionalism of those in charge. The cost of the Sochi Olympics, based on the global average, should have been US$24-billion (i.e., Putin's $12 billion, multiplied by two). The remainder -- US$26 billion -- consisted of embezzlement and kickbacks."

The report details how a circle of Putin's closest friends and cronies received the contracts to build the Olympic facilities -- and stole all of that money.

What's happened in Russia is that the old Soviet nomenklatura, which had become corrupt and sclerotic under Stalin and his successors, converted into capitalists in the 1990s when they could no longer keep the creaky state-planned Russian economy functioning. Now, as capitalists, they've discovered that with Putin in charge you can simply steal the profits of the land and be protected by the state. It's a pretty sweet deal.

Photo: tiger_days/flickr

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