I have been sitting on this story for a while, waiting to see if anything actually happens and now it appears that it will amount to something – so here goes. A few months ago, Russian construction entrepreneur and minigarch Valery Morozov started issuing public statements to Russian and UK media outlets, stating that a high-ranking Kremlin official had extorted $6.3 million in bribes from him. The bribes were demanded in exchange for a lucrative construction contract in Sochi for the 2014 Winter Olympics.
Morozov’s claims can be summarized as such: in 2005, his firm designed a “special presidential zone” in the Kremlin Palace. Everything went well, except the Kremlin didn’t pay Morozov’s firm. Morozov said he planned on going to the prosecutor’s office until “they” recommended that he wait for another contract in which his damages would be restored. Fast forward to 2009, when Morozov’s (74% ownership) company – OAO “Moskonversprom” (ОАО “Москонверспром”) – won a tender to to build the “Primorskiy” health spa in Sochi, a 700-room luxury residential complex on the Black Sea, which will house state officials during the 2014 Winter Olympics. An official in the Presidential Administration – Vladimir Leshchevsky, Deputy Head of the Office of Capital Construction – was on vacation during the tender and was furious to learn that Morozov’s company had won upon his return. Leshchevsky approached Morozov and allegedly said, “Of course you know that I was against the tender being given to your company…I support ‘Putivi’ [Путиви].” Morozov cited rumors that Putivi – a Yugoslav company – was controlled by Leshchevsky and his wife (note: I find nothing on Putivi in the gov tender database). Leshchevsky at first recommended giving the contract to Putivi and making Mosokonversprom a subcontractor, to which Morozov refused. Leshchevsky finally gave in, but only on the condition that Morozov pay a 12% kickback on the total value of the project (i.e., 12% of 1.5 billion RUR or $49.25 million = $6 million). But of course – there were problems, including the imposition of subcontractors from the former Yugoslavia affiliated with Leshchevsky and another official, Sergei Smirnov.
Morozov filed a complaint with investigators at the Economic Security Department of the Interior Ministry. The investigators even set up a sting operation where Morozov wore a wire and paid Leshchevsky his kickback, but then informed Morozov the next day that they would not pursue his case and that the evidence had gone missing. So Morozov – like many a -garch before him – Morozov fled to the UK and unleashed the dogs. Leshchevsky immediately responded with a statement accusing Morozov, Kommersant, and Sunday Times of slander. The Prosecutor’s General office shortly announced it would initiate an inquiry, but I got the feeling that this would be a Daimler-style inquiry with no results.
Apparently, I was wrong – on July 20th, Pres. Medvedev publicly ordered Prosecutor General Yury Chaika to investigate the Morozov affair – after the Prosecutor General had announced its investigation. How publicly did Medvedev do this? He sent his handwritten order to Novaya Gazeta (pictured right), which had published the story with Morozov’s most detailed allegations. Indeed, Medvedev wrote the order on a printout of the very story from Novaya Gazeta! Medvedev’s order to Chaika: “Investigate and report.” Three weeks later, Russian media reported that Leshchevsky would be charged under Article 290 of the Russian Criminal Code (“Receipt of a Bribe”).
What’s the takeaway of all this? Here are, in my humble opinion, the salient points:
- Power to the Press – for all the talk about Russia not having a ‘free press’ (mostly in reference to television), the Russian print and online media are growing in influence, especially with the liberal technocrats that surround Medvedev. In this way, Morozov – whether his complaints have merit or not – chose the right strategy in pursuing his media strategy. Foreign firms may choose to follow suit in the future, though maybe perhaps in more indirect ways.
- Medvedev Walks the Walk – say what you may about Medvedev’s feeble attempts at reforming Russia’s corrupt bureaucracy, but the guy does genuinely care about this issue, or at least genuinely wants to be seen as genuinely caring about the issue.
- Weakness of the Power Vertical System – Medvedev’s silly handwritten order is consistent with the Putinist style of governance, where one man must literally involve himself in every issue before anything is done. I know this is how many “high-profile” issues were resolved during Putin’s presidency and now it appears to continue under Medvedev’s presidency. I assume or at least home Medvedev realizes that it is this system itself that fuels corruption, since ne’er-do-well officials appear to be at play when the cat is away.
- Poor Message to Foreign Investors – overall, this sends a very bad signal to foreign investors, who lack the local knowledge and contacts of the Morozov’s of the world. How would a Western construction firm respond to the same situation? With the prospect of anti-corruption enforcement for overseas conduct looming back home, many companies might just avoid such project or investment in Russia altogether based on stories like this.
- Olympics of Bribery – the 2014 Winter Olympics were supposed to be Russia’s chance to show the world that it was “back” – that it could professionally host an international event without incident or scandal. This scandal – a full 4 years out – is a bad omen.
- The Wrong Krysha? – in Russia, an individual or business’ protection from hostile parties is known as his krysha, Russian for roof. It’s not clear who Morozov’s krysha was, but it is worth pointing out that the minority owner of his business is the Moscow government, which suggests he is in Luzhkov’s circle. Thus, this whole episode may be best understood in the context of the growing battle between the Kremlin and Luzhkov – i.e., Leshchevsky saw a weakness in Morozov and took advantage of it.