US Treasury Department accuses Russian tycoon Deripaska of laundering money but offers no evidence

US Treasury Department accuses Russian tycoon Deripaska of laundering money but offers no evidence
The US Treasury Department has accused Russian tycoon Deripaska of laundering money in a letter sent to his lawyers, but the claims are not underpinned by any real evidence.
By Ben Aris in Berlin February 14, 2020

The US Treasury Department (USTD) has justified sanctions on companies belonging to Russian tycoon Oleg Deripaska on hearsay and news reports as well as erroneous information, according to a letter provided to the Russian businessman’s lawyers, a copy of which has been obtained by bne IntelliNews.

Deripaska has been attempting to clear his name since the USTD was forced into a humiliating climbdown at the start of last year, when stringent sanctions that were imposed on his assets on April 6, 2018 had to be withdrawn as unworkable in January 2019—they were the first sanctions on Moscow to be dropped since sanctions were imposed in 2014 following Russia’s annexation of the Crimean Peninsula. The sanctions specifically targeted Deripaska’s Rusal metallurgical business and caused chaos on the international metal markets as a result.

The new document has been used by the USTD to justify fresh sanctions on Deripaska. It cites reports that Deripaska laundered money for Russian President Vladimir Putin, according to a report in the Financial Times.

The Office of Foreign Asset Control (OFAC), the agency that oversees US sanctions policy, sent a letter to Deripaska’s lawyers presenting the evidence that the threat of sanctions is based on claiming that he was “reportedly identified as one of the individuals holding assets and laundering funds on behalf of Russian President Vladimir Putin,” the letter said as cited by the FT. OFAC said in the letter that it was only listing “unclassified” sources, suggesting it has more classified evidence, although OFAC did not say this explicitly.

Deripaska has sued OFAC and demanded that it release the details of the accusations against him so he can defend himself, but so far he has had no success with his demands. As for the accusations that Deripaska laundered money for Putin, Dimitry Peskov, Putin’s spokesperson, as cited by the FT, said: “That’s not true. As simple as that.”

Unsubstantiated claims

Many of the claims and justifications in the letter are risible and indicate prejudgements, or are simply unsubstantiated.

Sochi: The first of six reasons on the list is that in January 2012 then Prime Minister Putin “compelled” Russian oligarchs to invest in projects associated with the 2014 Olympics. Deripaska invested $800mn into various projects through his company Basic Elements, such as the construction of Sochi International Airport enabling visitors to fly directly to the city. All of the projects were commissioned on a commercial basis. Moreover, Basic Elements undertook this construction with respectable international partners such as Germany’s Strabag.

The second point on the list makes the same complaint: “As of late January 2018, Deripaska was reported to have financed projects upon request of Vladimir Putin and senior Russian officials.”

There is nothing illegal about the Kremlin having pressured oligarchs to invest in Sochi or anything else, nor are investments evidence of corruption. Indeed, as bne IntelliNews reported in 2007 in a cover story “ZAO Kremlin”, Putin has always met with all the oligarchs to discuss their investment plans to ensure they dovetail with the Kremlin’s own plans. Indeed, it is common practice across the Commonwealth of Independent States (CIS), where oligarchs are all major economic actors.

What stands behind the Sochi allegation is the widespread reporting on “the most expensive/corrupt Olympics ever”, as a total of circa $50bn was spent on the Sochi preparations.

That is a lot of money, as much as 10 times more than is usually spent on Olympic preparations. But as bne IntelliNews reported at the time, these investments were not just about the Olympics because the Kremlin used the event as a template for regional regeneration across the board—a model that was then extended to the 2018 FIFA World Cup football tournament in Russia, where 14 more major regional cities enjoyed some transformation through sporting event infrastructure spending.

After the two big sports events, the Kremlin followed up with the renewal of the May Decrees in 2018, which were also focused on regional development but went into a lot more detail, specifying wage increases for doctors, teachers, firemen, and so forth, as well as ordering regional governmental infrastructure spending. That was then followed by RUB25.7tn ($390bn) of investments planned for the 12 national projects, in which almost eight times more will be spent on regional development than in Sochi. There has been a clear growing focus on regional development in Russia that started with Sochi and has been gathering momentum ever since.

While there was of course corruption involved in the Sochi preparations, as it was the test bed for the regional development strategy, since then the city has flourished. Its population has doubled in size as a result of the Olympic regeneration programme—a fact that has not been widely reported. And the oligarchs, as the leading economic actors in the country, have been pressed into service.

GAZ: One of the claims spelled out by the letter is that Deripaska cancelled a planned IPO of his car plant GAZ “to hide Russian President Vladimir Putin’s money-laundering through the company, as recently as September 2017”.

However, GAZ is already publicly listed and has been since 2007. The company reports IFRS accounts and has major international minority shareholders. In other words, in a country like Russia where everything is possible if you are willing to pay, using GAZ as a money-laundering vehicle is a very poor choice of vehicle.

It’s possible that the USTD letter is referring to reported plans to list GAZ shares in India in 2008, or a listing in Hong Kong where Rusal was listed in January 2010. The Indian plan was quickly abandoned and a Hong Kong listing was never seriously discussed in public, especially after the Rusal listing there turned out to be a disappointment. However, it is also possible OFAC is referring to classified evidence, but it looks more like simple ignorance of the fact that GAZ is already a listed company.

GAZ is also a good example of why oligarchs are expected to invest in state-sponsored regional development. As bne IntelliNews has been reporting, the mooted US sanctions on GAZ threaten not only Deripaska’s wealth, but the entire economy of Nizhny Novgorod where the plant is located. As the major employer in the region and owner of the company that makes up a large part of the local economy, Deripaska is obliged to co-operate with the local and federal-level governments.

In December, a group of GAZ workers went on a road trip from their home town to Germany to publicise their plight.

“We have driven here from Nizhny Novgorod to raise awareness of the effect that the US sanctions have on normal people and the collateral damage that these sanctions are going to have on the lives of 40,000 workers,” Yevgeny Morozov, the head of the GAZ trade union, who is leading the expedition, told a bne IntelliNews correspondent who was on the trip with them. “If you include the families of the workers then the knock-on effects will affect the whole population of Nizhny Novgorod.”

Morozov claims that the livelihoods of over a million people are on the line if sanctions force the plant that was set up by Lenin himself to close. Rather than giving Putin money, Deripaska lobbied the government for RUB300bn ($469mn) of state support in April last year to help the plant out. It has been struggling financially since the first phase of sanctions were imposed on it by the USTD.

Putin proxy: the fourth item on the list claims: “In December 2016, Deripaska was reportedly identified as one of the individuals holding assets and laundering funds on behalf of Russian President Vladimir Putin.”  And the fifth item says much the same thing.

Despite the best efforts of Putin’s foes, no evidence whatsoever has been produced that he holds or controls any money outside his official income. Former fund manager and now the Kremlin’s nemesis Bill Browder told bne IntelliNews recently in Berlin: “Based on my estimates I believe Putin is worth $200bn.” That would make Putin the richest man in the world several times over. Yet Browder and his peers have been unable to provide a single shred of evidence to support these claims.

That is not to say that Putin won’t end up a very wealthy man when he eventually retires. As this publication has reported, he is surrounded by the stoligarchs—a small circle of state-sponsored oligarchs who win the lion’s share of big state contracts to build things such as the Kerch Bridge or the Power of Siberia gas pipeline. These men have become multi-billionaires in the process and will almost certainly make sure Putin’s nest is well feathered if he demands it. But as bne IntelliNews has written on other occasions, greed is not one of Putin’s vices; he is more focused on making Russia great again. Having said that, he has been spotted wearing very expensive watches and jogging pants on occasion. But again, all the leaders of the CIS are guilty of lining their pockets and those of their underlings; corruption is the system in emerging Europe.

The fifth item on the list makes a slightly more explicit claim of at least one occasion being “a cover to facilitate the transfer funds for the personal use of then Prime Minister Vladimir Putin.” This has never been reported and must be based on classified information, so it is impossible to judge unless the evidence is released.

However, there is a precedent for this sort of transaction. Following the bombing of the White House in Moscow in 1993 by former President Boris Yeltsin, much of the reconstruction of the building and environs was carried out by a firm called Mabetex.

The next year an Italian bank executive from Banca del Gottardo responsible for Eastern Europe produced photocopies of the Yeltsin family's credit cards, including the signatures of Yeltsin and his daughters, that drew on the Mabetex account at the bank. Swiss magistrates later raided the Mabetex headquarters in Lugano and confiscated the records and the cards themselves.

While it appears unlikely that Putin and Deripaska would set up a scheme as transparently easy to prove as this, it is possible that a well-connected oligarch made cash available to Putin and his family.

Kyrgyzstan: The last item on the list is frankly bizarre. It says simply that “In late 2004, Deripaska reportedly acted on verbal instructions from President Vladimir Putin in a high-level bilateral meeting between Russia and Kyrgyz representatives."

So Deripaska was at some diplomatic meeting and Putin told him to do something and he did it? There is no mention here of money or business. There is nothing illegal or suspicious about a big businessman being at a high-level diplomatic meeting. The CEOs of both Gazprom and Naftogaz were at the last Normandy Four summit in Paris on January 15, when Putin met Ukrainian President Volodymyr Zelenskiy for the first time. Nor is there anything strange about those businesspeople doing something their president asks them to do at such a meeting.

But this accusation is taken as part of the basis of evidence to justify imposing fresh sanctions on Deripaska and his assets.

Forbes list of bad guys

The evidence laid out in the USTD letter is almost all based on “reportedly”. Presumably there is substantial classified evidence behind this open source information. But on the face of it this evidence proves nothing and cannot be used as justification for more sanctions.

This is not the first time that the US administration has based important sanctions decisions on spurious press reports. In the run-up to the April 2018 round of sanctions at the start of that year investors were afraid many of Russia’s top businessmen would be named on a sanctions list released at the end of January the same year.

The USTD did release a list of 96 names of “oligarchs” that were potential targets; however, it quickly became clear that rather than being a well-researched list of businessmen who may be guilty of criminal behaviour and/or close ties to the Kremlin, the published list was simply a copy of the annual Forbes Russia rich list of the wealthiest businessmen.

Forbes went through the lists and confirmed that indeed the Treasury Department’s list was an exact replica of the Russians on the 2017 billionaires list. In an emailed statement to Forbes, a Treasury spokesperson explained that the unclassified report was derived from open sources, including Forbes and others. To qualify for the USTD version of the Forbes list, all an oligarch had to do was be worth more than $1bn. In addition to some businessmen that do qualify as an “oligarch”—someone that has both a lot of money and a lot of political influence—the majority of men on the list are respectable Russian businessmen such as Arkady Volozh, the found of Yandex, Europe’s most valuable tech company, and Andrey Gurev, the CEO of Phosagro. Indeed, Gurev told bne IntelliNews there was a lot of confusion over his inclusion, as it was not clear if the list referred to himself or his father, a former Duma deputy, who has the same name.