Wednesday, March 13, 2019

This day in history: 138 years ago today, on March 13, 1881, Tsar Alexander II — the emancipator of the serfs — was murdered in St. Petersburg when two assassins attacked his carriage with bombs.

Russia’s Federation Council approves law penalizing fake news and disrespect toward the government

Russia's FSB sues independent newspaper for reporting torture allegations, demands retraction

Public backlash prompts officials in Irkutsk to audit construction of bottling plant that would have exported Lake Baikal water to China

A new Duma law bans hostels in residential spaces. Is this the end for affordable tourism in Russia?

Economist Andrey Movchan takes OCCRP's “Troika Laundromat” investigative report to the cleaners

The Federation Council of the Russian Federation gave its approval to two new bills despite opposition from another federal agency. The bills would penalize Internet users and online media for publishing “unreliable” information of social significance or spreading “obscene” criticisms of the Russian government, its symbols, or some of its members.

On March 11, Russia’s Presidential Council for Civil Society and Human Rights requested that the Federal Council reject both bills in their current form and send them back to the State Duma to be amended. The Presidential Council’s experts found that both bills contain vague language and a number of potential loopholes that could be abused.

The Federal Security Service (FSB) has filed a defamation lawsuit against the independent newspaper Novaya Gazeta and correspondent Ivan Zhilin, demanding the retraction of two articles published in January about the alleged torture of a man detained in Magnitogorsk after an explosion killed 39 people last December.

The lawsuit claims that Novaya Gazeta’s reporting “is untrue” and “damages the FSB’s professional reputation.” In January, following the apartment building blast, the authorities detained a Kyrgyz citizen named Khudnidin Zainabidinov. His wife and multiple human rights advocates told Zhilin that he was tortured in FSB custody. A few days after Novaya Gazeta’s first report, however, Chelyabinsk state attorney Vitaly Lopin claimed that Zainabidinov and his wife had recanted these allegations.

“The content and semantic tenor of [Novaya Gazeta’s] statements about the use of torture and violence against a citizen by a state agency, which serves as a mechanism for the protection of individual rights, freedoms, and dignity, undeniably creates a negative view of this federal agency for a wide range of readers,” the FSB argues in its lawsuit. The agency demands that the newspaper delete both articles and publish a retraction.

Novaya Gazeta’s editors say they are still reviewing the case materials. A preliminary hearing is scheduled to take place next week on March 21.

Federal investigators previously launched a preliminary inquiry into reports that Khudnidin Zainabidinov was tortured after his arrest. In 2018, Russian journalists documented more than a dozen cases of torture carried out by FSB agents.

On the night of December 31, 2018, an explosion shredded an apartment building in Magnitogorsk and killed 39 people. Russia’s Federal Investigative Committee has reiterated that a gas leak is the leading explanation for what caused the apartment collapse, but several news outlets have reported unverified rumors that the supposed gas leak was actually the work of terrorists.

This Tuesday, March 12, Prime Minister Dmitry Medvedev ordered National Resources and Environment Minister Dmitry Kobylkin to verify that the construction of a bottling facility in the Lake Baikal area complies with “the strictest environmental standards.”

Construction on the plant began this January, supported by 1.5 billion rubles ($22.9 million) in investment from the company “Aquasib.” The facility was expected to begin operating by the end of the year, before construction is completely finished in 2021. Roughly 80 percent of the plant’s production is earmarked for export, mainly to China, South Korea, and Mongolia.

The construction work has provoked local protests, and there are now nearly 900,000 signatures on a Change.org petition calling on Irkutsk Governor Sergey Levchenko to halt the development of a “factory to bottle Lake Baikal water for China.” More than 142,000 Instagram accounts have subscribed to @baikal_save, which critically reports on the construction work. Activists are planning protests in several major cities across Russia, and officials in Irkutsk have already issued a demonstration permit.

On social media, Russian television personalities Elena Letuchaya and Victoria Bonya have endorsed the protesters’ demands. On March 4, Russian cosmetic artist Sergey Zverev picketed outside the Kremlin, leading to misdemeanor charges for staging an illegal demonstration.

Environmental protection officials in the Irkutsk region later flagged code violations in the construction of the water bottling plant, declaring that the building disrupts a habitat of endangered birds. Governor Levchenko immediately ordered the region’s law enforcement agencies to verify the construction project’s legality.

On March 12, the governor announced that he sees no way forward for the bottling plant, stating that inspectors found several code violations after construction work began, even though the project passed all the necessary regulatory checks. “I think the violations that were turned up are nearly insurmountable,” Governor Levchenko told reporters.

On March 6, Russia’s State Duma approved a new law that consists primarily of a single sentence: “A residential space in a building with multiple apartments may not be used to provide hotel services.” As of March 13, the Federal Council had requested that the final draft of the law be modified to go into effect on January 1, 2020 rather than taking effect immediately. However, the Council’s members indicatedsupport for the law, and there is no doubt that it will sooner or later become active.

Does this mean hostels will be banned in Russia? Will Russians be able to turn apartments into nonresidential spaces and open hostels that way? Why did the Duma decide to ban hostels? Have people living near hostels complained about them? Has the ban received widespread approval? Will Russians who rent out their apartments also face legal trouble? Did Russian hostels face any pushback before this law was introduced? When the new ban is approved, will all the hostels in the country be closed down?

Read Meduza's special report: “A new Duma law bans hostels in residential spaces. Is this the end for affordable tourism in Russia?”

It’s been about a week and a half since the Organized Crime and Corruption Reporting Project (OCCRP) published an investigative report about the investment bank Troika Dialog’s “vast offshore network,” dubbing it a “laundromat” that allowed Russian oligarchs and politicians to amass wealth and live luxuriously while exploiting poor “unwitting signatories.” Andrey Movchan, who served as Troika Dialog’s executive director from 1997 to 2003 (leaving three years before the “Troika Laundromat” research begins), argues in a new article for the Carnegie Moscow Center that OCCRP’s reporting relies on misinterpretations of complex financial flows, the character assassination of Troika’s former head, Ruben Vardianian, and the misrepresentation of legitimate investment banking practices.

Movchan dedicates an early section of his article to defending Ruben Vardianian, suggesting that OCCRP’s attention to his Armenian heritage borders on prejudice. Movchan points out that anti-corruption activist Alexey Navalny similarly accused Vardianian of dirty dealings in 2009, claiming that the banker received a nonmarket, unrecoverable loan from Sberbank to finance part of the Skolkovo Business School’s construction. Movchan says Vardianian actually got the money at a 13-percent interest rate, and later paid it back in full (though Navalny still accuses Vardianian of corruption to this day).

Amateur arithmetic

Movchan’s biggest problem with OCCRP’s work is that it’s carried out by “well-meaning” reporters who he says are largely ignorant about the details of major financial transactions, the history of markets, and the configuration of the Russian financial ecosystem a decade ago. For example, he faults OCCRP for attributing significance to the number of shell companies and banking transactions it uncovered.

Why? A “family office” investment group like Troika offers complex financial services to high-net-worth individuals, helping them structure their assets and “park” them in companies that are subject to preferential taxation. Wealthy clients pay to create these companies, manage them, and so on, which means a firm like Troika administers hundreds or even thousands of these offshore companies, and corporate lawyers even conduct correspondence about the companies and customer transactions, creating the impression that these companies are “theirs.” In order to minimize clients’ tax burden and unbundle the risk they face, Troika executes transactions in dozens of markets, often creating multiple offshore companies for every license, market, deal, and so on — which is why it’s irrational to assign special meaning to the number of recorded transactions, he says.

Movchan also objects to OCCRP’s reasoning that the amount of “obscure” banking transactions it discovered is incriminating. The journalists argue that Troika’s offshore system generated internal transactions worth $8.8 billion “to obscure the origin of the cash,” but Movchan points out that this is roughly equal to the flow of money directed into and out of the network identified by OCCRP, and it clearly leaves out hundreds of billions of dollars in Troika’s total business volume (trading securities, borrowing and paying back loans, back-to-back loans, and other transactions that amount to as much as $1 trillion over those seven years). In other words, OCCRP’s study addresses roughly 1 percent of Troika’s business.

OCCRP says criminal companies used Troika to move $130 million of the $230 million in stolen tax rebates uncovered by Sergey Magnitsky. Movchan admits that this is a lot of money, but he questions the numbers, explaining that the perpetrators executed roughly 10,000 banking transactions in Russia to cover their tracks, which likely scattered the funds in too many directions for all $130 million that reached Ukio Bankas to have been stolen money. In other words, Movchan guesses, some of the Magnitsky money flagged by OCCRP was in fact legitimate old trade turnover from Hermitage Capital Management’s Russian companies. In any event, Movchan says it’s unlikely that the schemers recruited knowing accomplices inside Troika, given that they were able to fool European banks with far stricter oversight procedures.

Safety in offshores

Offshore companies aren’t just tax dodges, Movchan says, but entities that streamline shareholders’ rights and minimize bureaucracy for the “better structuring of property.” In Russia, he points out, offshores are also an important line of defense against “raider attacks” by “bandits or security officials.” This is one reason people hire Troika to designate “nominal owners,” to insulate them from their assets, rendering them incapable of surrendering their wealth, even in the event that they’re kidnapped or arrested.

What about Vardianian’s “Armenian proxies,” like Armen Ustyan? Movchan says it would have been ridiculous to make Ustyan the nominal owner of an offshore, if the company’s purpose had been money laundering. If the business had been moving money illegally, Troika would have hired a nominal owner in Cyprus or the Cayman Islands, Movchan says. Whatever the reasons for choosing Ustyan, Movchan is confident that he consciously agreed to the role, receiving money for his part, as well as warnings against divulging any information about the deal, which is presumably why he denied his participation, when confronted by journalists. (Movchan says it’s also possible, though less likely, that Troika’s lawyers forged Ustyan’s signature out of procedural laziness.)

Stranger than fiction

Movchan says OCCRP again reveals its ignorance about investment banking when it claims that “fictitious sales” were used as a “fig leaf of legitimate economic activity” to hide money laundering. In the financial world, Movchan says, money transfers between offshores are typically managed as forgiven loans, which are legal and tax-free. There are rare circumstances, he says, when companies want the appearance that a recipient earned the money, but even in these cases it’s far simpler (and less messy) to trade securities, currencies, or derivatives than falsify commodity deals. Movchan says what’s likely is that some of Troika’s clients actually traded in physical goods, and the firm’s clerks merely executed the payments without bothering to describe the goods (which remains the standard banking practice today).

And what about the celebrities who appear in OCCRP’s report? Movchan believes Prince Charles and the musician Prince were added to this research for dramatic effect, not substance, and also to depict Ruben Vardianian as a sort of bandit who steals by day and lives luxuriously by night. Meanwhile, Movchan says it’s a mystery who backs Sergei Roldugin, Vladimir Putin’s favorite cellist, but he’s confident that Roldugin requested the payments to his companies, reasoning that Vardianian would have gone to Rostec, where he enjoys considerable clout, and not bribed Roldugin, if he needed “a favor.”

Yours, Meduza