COMMENT: The Shuvalov Affair

By bne IntelliNews November 8, 2012

Michael Weiss of Henry Jackson Society -

Of all the scandals to rock the Kremlin in recent years, none has been as potentially damaging or as swiftly damage-controlled as the case of Igor Shuvalov, the first deputy prime minister of the Russian Federation.

Beginning in December 2011 and extending into May 2012, two previously little-noticed transactions - one involving the purchase of a sizable stake in an imperiled Anglo-Dutch steelmaker, the other involving Shuvalov's by-proxy investment in Gazprom during its "liberalization" period - have been extensively investigated by the international financial press. Public interest in these deals has been driven, in part, by the tabloid sensationalism of watching some of Russia's oligarchs appear as supporting characters in a melodrama set in the heart of Vladimir Putin's presidential administration.

The "Shuvalov Affair" would be less fascinating if Russia's reputation for transparency and accountability did not make it - as described in US State Department cables - a "virtual mafia state". Journalist Luke Harding summarized these cables' contents in his memoir detailing his time as The Guardian's much-chivvied Moscow correspondent: "Arms trafficking, money laundering, personal enrichment, protection for gangsters, extortion and kickbacks, suitcases full of money and secret offshore bank accounts in Cyprus and Switzerland: the cables unpick a dysfunctional political system in which bribery alone totals an estimated $300bn a year, and in which it is often hard to distinguish between the activities of government and organised crime."

Accused by prominent Russian opposition figures of taking bribes and profiting from insider trading, Shuvalov claims that his family's vast fortune - estimated today to be in excess of $200m - was obtained lawfully and transparently. In this, he has been supported by an array of past and present government officials. Alexander Voloshin, a former chief of staff to both Boris Yeltsin and Putin, wrote on his blog: "Shuvalov is a direct, consistent and principled person of progressive views: He has always been for demonopolizing the economy, for privatization and for a leaner government. I believe it is for his principles and also his management abilities that the president and prime minister value him. For the same reasons he has plenty of opponents and ill-wishers. And for the same reasons it is now that he is being attacked."

Nevertheless, certain counter-claims advanced by Shuvalov and his surrogates in support of his defense cannot be corroborated with the available evidence. In instances where a proffered corporate document might extinguish all lingering doubt about Shuvalov's business practices, none has emerged. Moreover, allegations of possible conflicts of interest in which Shuvalov profited from companies in which he was, at least tangentially, involved in reforming as a government official are not so easily dismissed as his defenders suggest. Most of the controversy surrounding Shuvalov has been rebutted or contextualized by unnamed sources, who various press organs have described as having close ties to him and his activities during the episodes in question. However, other anonymous sources contradict these claims.

Whatever the reality, this case has done more than merely expose the opacity with which sizable fortunes are made in contemporary Russia - it has shown how big business and big government in the age of Putin are no longer complementary or mutually reinforcing but rather one and same.

Shuvalov's background

After a brief stint at the Russian Foreign Ministry, Igor Shuvalov became a successful corporate attorney at the law firm ALM in the mid-1990s. During that time, ALM amassed an array of high-profile clients, including the European Bank for Reconstruction and Development, Sibneft (a state-owned oil company created for the purpose of privatization), and OLBI (a trading company owned by Russian entrepreneur Oleg Boyko).

Shuvalov, a reputed economic "liberal", resumed his career in government in 1997, working for Russia's State Property Committee. He soon became the Deputy Minister of State Property of Russia and then, the Chairman of the Russian Federal Property Fund.

After a series of successful posts within Putin's Presidential Administration, Shuvalov became Russia's 'sherpa' to international institutions, such as the World Trade Organization, the Davos World Economic Forum, and the G8. Said to have private reservations over Putin's handling of the state seizure of Mikhail Khodorkovsky's oil giant Yukos, Shuvalov sided with Putin publicly on the matter.

When Dmitry Medvedev assumed the Russian presidency in 2008, Shuvalov was appointed First Deputy Prime Minister, widening his slate of responsibilities and becoming Russia's 'face' to Western enterprises and business leaders.

The Corus controversy

In December 2011, a Barron's exclusive examined how Shuvalov's family trust, Sevenkey Limited, a Bahamas-registered company registered in the name of Olga Shuvalova (Shuvalov's wife), made $119m, after lending $49.5m to another offshore company, Gallagher Holdings, owned by billionaire oligarch Alisher Usmanov. Usmanov wanted the money to invest $319m in struggling Anglo-Dutch steelmaker Corus Group.

Usmanov has said that he had difficulty financing the investment through banks and so approached three of his friends for financing: Vasiliy Anisimov, the owner of Coalco Metals; Vladimir Nikitenko, the head of Petrokommerz Bank; and Shuvalov, whom Usmanov had met through the oligarch Roman Abramovich during Shuvalov's days at ALM.

The entirety of the $49.5m was deposited in the bank account just weeks before the money was loaned to Gallagher Holdings, a Cyprus-registered company under the guidance of Eugene Shivdler, another billionaire oligarch who, at the time, ran Sibneft.

The loan from Sevenkey Limited to Gallagher Holdings had a stated interest rate of 5% per annum. However, Gallagher paid Sevenkey $119m during 2005-2007, reflecting a more than 40% annualized rate of return on the original loan. The reason for such a large return owed to a series of 'amendments' made to the original loan, including a 2006 amendment which stipulated that if Gallagher Holdings earned more than $1bn that year, which it did, it would 'gratuitously' pay Sevenkey Limited 4.9% of Gallagher's investment revenue for 2006. A 4.9% gratuity on Gallagher's investment income for 2006 amounted to $50m.

There are outstanding questions pertaining to this loan and the outsize return for the Shuvalovs. For one, Gallagher's audited financials for 2006 do not reflect the receipt of the $49.5m Sevenkey loan; rather, they only disclose a variety of bank loans Gallagher took out, all at an annual interest rate of approximately nine per cent, in a bid to finance the Corus investment.

These facts raise the question: Why did Gallagher borrow from Sevenkey if, contrary to Usmanov's admission to Forbes, there were banks that were willing to lend Gallagher money? And why did Gallagher take out a loan from Sevenkey when doing so ultimately meant paying back more than twice the original borrowed sum?

In accounting for where Sevenkey Limited got the $49.5m in 2004 to lend to Gallagher Holdings, Shuvalov has claimed that it was in part the result of a 0.5% stock option he held in Sibneft. He says he was awarded the option for his legal services to the oil company whilst still a managing partner at ALM in the mid-1990s. Roman Abramovich's spokesperson has confirmed that this option was indeed granted to Shuvalov.

Russian opposition figure and anti-corruption activist Alexey Navalny doubts the veracity of this claim because no such stock option was ever made public during the due diligence proceedings in the 1998 negotiations between Sibneft and Yukos. The stock option is also not mentioned anywhere in Sibneft's financial statements from the mid-1990s, nor was it cited in the British High Court case of 'Berezovsky v. Abramovich', which shone a light on the obscure corporate governance and shareholding structure of Sibneft at this time.

A 0.5% Sibneft stock option granted in the mid-90s would have been enormously remunerative given the minimal public ownership of the oil company. Other actors in the Sibneft privatization scheme, such as Boris Berezovsky and Badri Patarkatsisvhili, were not granted stock options in Sibneft despite their integral roles as government lobbyists. Neither Shuvalov nor Abramovich has proffered any documentary evidence to substantiate the existence of the 0.5% Sibneft stock option.

Questions surrounding the Shuvalov family's wealth in the mid-90s are also pertinent to Olga Shuvalova's claims in the Russian media that, at this time, she still needed to work to help supplement her husband's modest government salary. Her declared incomes in 2008, 2009 and 2010 were, respectively, $12m, $20m and $10m.

The Gazprom investment

In 2004, Regional Property Developments Ltd - Sevenkey's UK-registered subsidiary - deposited $17.7m into an account in the Amsterdam Trade Bank, which then lent the money to Nafta Moskva, the investment vehicle of then- Russian 'minigarch' Suleyman Kerimov. Nafta Moskva subsequent subsequently invested this and other funds, largely obtained as loans from Russian banks such as VEB and Sberbank, into Gazprom's stocks.

During this period (2003 and 2005), Gazprom, Russia's state-owned gas giant, was undergoing a period of 'liberalization', which made some of its early investors enormously wealthy. Kerimov made $20bn.

According to sources consulted by the Financial Times, Sevenkey sold off all its remaining shares in Gazprom by early 2008. Sevenkey made more than $100m from its Gazprom shares in fewer than four years.

Correspondence obtained by Russian Forbes shows that in 2007, Nafta Moskva paid $20m back to a company owned by Olga Shuvalova (presumably Regional Property Developments Ltd).

In 2004, Shuvalov was acting as Putin's 'economics czar' and his responsibilities including advising on the liberalization of state assets, prompting allegations of a conflict of interest given his by-proxy investment in Gazprom.

Shuvalov's defenders, including former Finance Minister German Gref, deny that there was any conflict of interest. Gref insists that Shuvalov was not an 'insider' and took no part in the discussions about Gazprom's reforms. Gref's claims have been refuted by 'another senior official at the time' interviewed by the Financial Times , who argued that Shuvalov was, in fact, part of a small circle of intimates who had direct knowledge of the Gazprom liberalization process.

The aftermath

In April 2011, the Russian General Prosecutor's Office opened an investigation into Shuvalov's business dealings, largely on the back of disclosures in the Barron's December 2011 exclusive.

The Prosecutor's Office later said that it uncovered no evidence of any illegality or wrongdoing on the part of the Deputy Prime Minister. The Office argues that there are no facts that prove that Shuvalov had any direct involvement in the operations of Sevenkey, nominally controlled - via other companies - by his wife. The Office also concluded that the money the trust made from the Corus deal was legitimate.

Shuvalov's involvement with Usmanov is complicated further by the governmental role he occupied during the 2008-2009 economic crash - as the head of a state commission tasked with stabilizing the Russian economy and targeting enterprises considered to be deserving of government stimulus subsidies. One such enterprise was Metalloinvest, Russia's largest iron ore company, owned by Usmanov.

According to a Russian government website, Shuvalov's commission 'merely approved the decision', which had actually been made by a separate commission headed by the then Deputy Economy Minister, Oleg Savelyev. Nevertheless, Shuvalov authorized $30bn in state guarantees for Metalloinvest, which Savelyev's commission subsequently approved.

According to Forbes, the then Prime Minister, Vladimir Putin, was fully aware of Shuvalov's earnings and how he made them: 'Putin's spokesman Dmitry Peskov stressed that Shuvalov always informed him about his transactions.'

Anti-corruption activist Natalia Pelevine has filed a complaint with the Federal Bureau of Investigation, on the basis of Eugene Shvidler's involvement in transferring money to Sevenkey via Unicast Technologies Limited (Shivdler is an American citizen). She has also raised the Corus Group transaction with Britain's Serious Fraud Office, citing Usmanov's and Abramovich's residence in the UK. According to Pelevine neither appear to be actively investigating the matter.


There is much that still cannot be established without further evidence, particularly with regards to the existence of Shuvalov's alleged 0.5% stock option in Sibneft, and also, the extent to which Shuvalov may have had a direct hand in the share value-enhancing reforms imposed on Gazprom during the same period in which he had invested $17.7m in the company's future success.

The Russian General Prosecutor's Office has not disclosed the details of its investigation into the Corus deal. And there is no guarantee, given the current political environment in Russia, that any domestic investigation into the conflicts of interest, bribery, or insider trading involving a presidential aide, would be impartial.

Get the whole report here.

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