What to Make of Putin’s Anti-Offshore Crusade

Last month, PM Putin addressed the Government Commission on Electricity Generation. At the meeting, Putin launched into a searing critique of Russian companies using offshore “front companies.” Indeed, Putin noted, “Taking the Russian economy and its strategic sectors out of shady offshore zones is our high-priority task for the upcoming period.” Putin then went on to report on the findings of an audit conducted by the Ministry of Energy, which he ordered during a meeting with Deputy PM Igor Sechin in November. Specifically, the audit found “almost 50% [of senior officials of the power and energy sector] are affiliated with 385 commercial companies, except for those currently employing them.” Putin even named certain officials identified in the Ministry of Energy report.  Vedomosti later reported that all of the energy officials identified in the audit either resigned or were fired within one week. [Update: Vedomosti has published a useful follow-up to the report here; cross-posted here]

Putin concluded by saying, “We must be absolutely clear about the ownership structure, beneficial shareholders, and beneficiaries[of these companies]. This is a key sign of a civilized business climate and mature economy.” Putin then ordered the Ministry of Energy, Ministry of Economic Development, industrial agencies, and state corporations such as Gazprom, Transneft, Russian Railways, Sovcomflot, Vnesheconombank, VTB,  Rosatom, and Sberbank to “[take] and report on [similar] measures taken within the next two months.”

The Missing Order

On December 28, Putin issued an order (поручение) formalizing the request made during the meeting. The order – No. ВП-П13-9308 от 28 Декабря 2011 г. – is mysteriously difficult to locate online, prompting panicked, lengthy forum discussions among Russian lawyers looking for the elusive document. Fortunately, TRM was able to locate a copy, and made it publicly available here.

The order is five pages long, with three attachments, and requires certain state-owned companies to submit two types of information:

  1. Financial Info on Managers – information on the income, property, and property debts of all members of the management team and Board of Directors, in accordance with Attachment 1
  2. Info on Business Partners – all information – including identities of ultimate beneficiaries – on contracting parties (контрагенты), in accordance with Attachment 3

The order is addressed to the following companies:

  1. Rosatom
  2. INTER RAO UES
  3. RusHydro
  4. East Energy System
  5. Far East Energy Management Company
  6. System Operator UES
  7. Federal Grid Company UES
  8. MRSK Holding
  9. Gazprom
  10. Transneft
  11. Irkutskenergo
  12. Russian Railways
  13. Sovkomflot
  14. NGO Market Council
  15. Aeroflot
  16. Rostelecom
  17. Avtodor
  18. Vnesheconombank
  19. VTB (exempt from item 2)
  20. Sberbank (exempt from item 2)
  21. Rosselkhozbank (exempt from item 2)

As Vedomosti reported, Deputy PM Sechin personally prepared the list and notably excluded Rosneft, where he until recently served as Chairman of the Board. Rosneft replied to Vedomosti‘s article, saying it was untrue, and added that it is complying with the instructions in the order. Also left off were Sergey Chemezov’s Rostekhnologii and United Shipbuilding Corporation, as well as Rosnano.

State-Owned Companies – “Let’s Not and Say We Did”

The immediate response to Putin’s order by officials at the affected companies included various stages of shock, denial, and outrage. One legitimate complaint is that it is factually impossible to comply with the order, as currently formulated, because of the number of partners with whom these companies do business (even if the reportable contracts are limited to a certain $$ threshold). And if the contracting parties refuse to provide the information, the Russian companies would have to break their contracts with them. There are plenty of private American companies that would simply refuse to provide information on ultimate ownership, if only out of principle. The government gave some ground this month when it excluded clients from the reporting requirement, and limited ‘ultimate ownership’ information to business partner shareholders owning more than 5 percent of the company’s stock. President Medvedev also proposed delaying the deadlines for providing the information until after the March presidential elections.

Putin’s Born-Again Support for Corporate Governance

Putin’s new campaign against the evils of offshore entities is a bit puzzling, to say the least, because they have always been a problem in post-Soviet Russia and Putin has never expressed much concern about them. One tempting conclusion is that this is a reaction to the public outrage over corruption, but Putin’s instructions to Sechin came before the December Duma elections and subsequent protests.

Interestingly, Vedomosti reported that virtually all candidates for posts on the affected companies’ Boards of Directors will be drawn from Medvedev’s personnel reserve. Indeed, this furthers a trend over the past few years of Medvedev acolytes filling state-owned company positions. Could the new disclosure requirements be meant as a “gift” to Medvedev upstarts possibly looking to cash in on their new posts? This also seems doubtful, as Medvedev and his people have come out strongly in favor of the new rules, even suggesting that they could soon be passed into law.

The most interesting outcome will be the volume and level of detail of the material disclosed. If it is high-volume/detail, anticorruption campaigners will undoubtedly mine the disclosures for evidence of wrongdoing. The campaigners themselves have cautiously praised the new campaign, while noting that it is arising out of the current political climate and does not address Russia’s systemic corruption in a systematic way. Moreover, the disclosure requirement has all the hallmarks of a typical Russian response to complex problems – more paperwork. Note that these disclosures will shed no light on situations where business partners are pressured by officials to sign side contracts with service providers linked to said officials (e.g., as allegedly happened in the Valery Morozov case).

Finally, even if this is a good idea, why limit its application to state-owned companies, which should presumably be given more autonomy than government ministries/agencies? For example, when the Ministry of Health procures medical equipment for government hospitals, it is not required to identify and disclose the ‘ultimate beneficiaries’ of the suppliers. At least Gazprom in theory has an incentive to not overpay for goods and services because it is expected to be profitable, while government ministries can waste their entire budget without anyone noticing.

This entry was posted in Business, Business and Economy, corruption, Dmitry Medvedev, Gazprom, goskorporatsii, legal update, offshore, PM Putin, President Medvedev, Rostekhnologii, russia, state corporations, utilities companies, Vedomosti, Vladimir Putin, war on corruption. Bookmark the permalink.

2 Responses to What to Make of Putin’s Anti-Offshore Crusade

  1. nan says:

    Very insightful information. My question is: how effective can this “Anti-Offshore Crusade” really be?

    • jesseheath says:

      Well, there are two scenarios/perspectives, depending on how you interpret Putin’s intent:

      1. Putin’s goal is to appear tough on corruption, but not change the status quo – it will have limited success
      2. Putin’s goal is to legitimately reduce the role of corruption in Russia-related business transactions (particularly those involving state-owned entities) – it will fail miserably, except in isolated, anecdotal cases

      There’s also the chaos element – the release of information in a highly wired country like Russia can have a disproportionately high impact. Thus, any campaign predicated on increased disclosure has the potential to be more effective than the authorities ever intended (I think publishing all public tender documentation online is a good example). It would have been much smarter of Putin to simply ‘ban’ contracts with companies for which ultimate ownership cannot be established. In contrast, a disclosure policy can be policed and analyzed by the public in an ‘uncontrolled’ setting.

      There’s also the impact of the new offshore laws in the civil and criminal codes, which may have a chilling effect on Russians wishing to incorporate in an offshore jurisdiction. Still, I think offshore structures will continue to play a significant role in Russian business transactions for a while yet.

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