Weekly 27 July 2018

Why a Russian billionaire sponsored Maria Butina, the alleged Russian agent arrested in the U.S.

1. Why a Russian billionaire sponsored Maria Butina, the alleged Russian agent arrested in the U.S.

Maria Butina at a firearm legalization rally in Moscow, 2013. Photo credit: AP/TASS

The Bell learned how Russian billionaire Konstantin Nikolaev became the sponsor of the young Russian woman, Maria Butina, arrested in the U.S. on charges of illegal lobbying of Russian interests and attempts to support Donald Trump’s campaign via the National Rifle Association. But the story does not look like a Kremlin-sponsored political project.

  • In Russia, Nikolaev is known as the owner of railroad and port companies who has spent his life building his own businesses while helping his influential partners to enrich themselves — for example, Alexey Mordashov, No. 2 on the Russian Forbes list, or Arkady Rotenberg. At the beginning of the 2010s, he invested (Russian) in a company, Promtekhnologii, which produces sniper rifles under the ORSIS brand. Nikolaev’s wife was president of the company, and met in 2015 with representatives of the NRA during their visit to Russia. The visit was partially funded by Butina’s lobbying organisation, “Right to Arms”. One of ORSIS’ managers was the son of Deputy Prime Minister Dmitry Rogozin, who is responsible for the defense industry.
  • Another of Nikolaev’s partners in the arms business is businessman Igor Rotenberg, the son of Vladimir Putin’s old friend and one of the oligarchs closest to the president, Arkady Rotenberg. In 2012, Nikolaev’s company, Promtekhnologii, became the co-owner of two Russian cartridge production factories — Tulsky (45.2% stake) and Ulyanovsky (50%). In 2017, Igor Rotenberg became the second shareholder of both factories (with stakes of 47.04% and 50%). But in April 2018, Rotenberg was hit with U.S. sanctions and was forced (Russian) to sell part of his stakes so that the factories would not come under sanctions, as they sell cartridges for sports shooting in Europe and the U.S.
  • Nikolaev had a third arms business — together with high ranking FSB officers, he invested in a company which planned to produce sights for the Ministry of Defense, and another relative of Rogozin sat on the company’s board of directors.
  • As a source close to the Ministry of Defense and an acquaintance of Nikolaev told The Bell, the billionaire’s arms business began with his wife. Svetlana Nikolaeva took up practical shooting about ten years ago, got her husband hooked, and then suggested that he invest in the creation of a Russian rifle. In this way, ORSIS was born in 2010. Together with Nikolaev, the company’s co-owner became Mikhail Abyzov, who in 2012 became a minister without portfolio in Dmitry Medvedev’s government. At roughly the same time, Russia’s Ministry of Defense concerned itself with the creation of a pool of privately held arms producers in Russia. A special government commission was formed with this goal in mind. Abyzov was named chairman, and Promtekhnologii became a contender for state arms orders. A representative of Nikolaev, however, asserts that the businessman does not have any connection now to Promtekhnologii.
  • As a result, Nikolaev became a lobbyist for the legalization of firearms in Russia, his acquaintance said — it was then that he began to support the organization which Butina founded in 2010, “Right to Arms”. There was hope for liberalization of legislation under President Dmitry Medvedev, a source close to the Ministry of Defense explained. But after 2011, the question was taken off the table. At the same time, funding for the army increased, as well as the overall influence of the military — and the idea of private suppliers to the Ministry of Defense lost its relevance. According to the database of state orders, Promtekhnologii did not receive large orders from the Ministry of Defense. Another acquaintance of Nikolaev adds that the businessman became disenchanted with  “Right to Arms” even before this. Nikolaev’s representative stated (Russian) that the businessman stopped sponsoring Maria Butina’s organization in 2014.

Why the world should care

From everything which we know about Maria Butina’s affairs and the role Konstantin Nikolaev played in them, one thing is clear: the story is very different from the hacking of the DNC or Evgeny Prigozhin’s pre-election trolling campaign. The story doesn’t look like a high profile plan, approved at the highest levels, to interfere in elections or support Trump’s campaign. Nikolaev is a major businessman with powerful partners who are close to the Kremlin, but he isn’t an oligarch integrated with those in power: he doesn’t resemble the kind of person Russian authorities would select to act as their intermediary.

2. After the cancellation of new joint projects, Rosneft demands $1.1 billion from its foreign partners

What happened

The Russian oil sector is unlikely to see new foreign investors anytime soon due to sanctions, but state-owned Rosneft has figured out how to make money off of international companies which have been working in Russia for some time. Igor Sechin’s company is suing Exxon as well as its Japanese and Indian partners for more than $1.1 billion in oil flows from the field on Sakhalin island, part of the Sakhalin-1 project, a JV with western partners.

  • Rosneft is demanding a total of RUB 89 billion ($1.4 billion), but 20% of this amount would go to Rosneft’s subsidiary which has a 20% stake in Sakhalin-1.  The remaining shareholders are Exxon (30%, lead operator), Japan’s SODECO (30%) and India’s ONGC (20%). This is the only major project to develop oil fields in Russia which is being led by a foreign company.
  • With a high debt burden and difficulties attracting financing due to sanctions, Rosneft has learned how to make money in Russian courts, which almost always rule in favor of the company. At the end of last year, Igor Sechin’s company won $1.7 billion (almost half of Rosneft’s net income for 2017) from another Russian company, AFK Sistema, in a court case which many found dubious.
  • Claims for compensation for damages from oil flows are very rare: when major companies develop neighboring fields, they always agree the details of the projects ahead of time and exchange information, and any disagreements which might arise are normally decided outside of court. Lawyers were able to recall (Russian) in Russian case history only one other similar case which took place 13 years ago (then the plaintiff, Lukoil, won the case).
  • Before the beginning of the conflict between Russia and the west, Exxon was Rosneft’s most important international partner. In 2012, the companies agreed a partnership for the Russian shelf, and planned to invest up to $500 billion in projects in Russia. But sanctions forced Exxon to pull out of its projects in Russia in March 2018.

Why the world should care

We have already grown accustomed to Rosneft’s Russian court cases, but this one is the first which Rosneft has initiated against its foreign partners. Lawyers suggest that going to court with such unusual demands is actually an attempt to reach a beneficial out of court settlement with Exxon. The legal process will show whether it is simply a tactical trick in the context of difficult negotiations, or a sign that foreign companies are not longer needed as partners in the oil business.

3. The owner of Russian Forbes introduced censorship and replaced the editorial team

What happened

Russia, it appears, has lost yet another independent publication — the owner of the Russian language Forbes magazine first introduced censorship, removing an article from the magazine after it went to print, and after that, he replaced the editorial team.

  • The owner of Russian Forbes, businessman Alexander Fedotov, has been in conflict with the magazine’s editorial team since he bought the magazine. A businessman of moderate means, Fedotov bought Forbes Russia from Axel Springer in 2015, after Russia’s parliament banned foreigners from owning media publications in Russia. The Russian edition of Forbes was introduced in the early 2000s by investigative journalist Paul Klebnikov, who was murdered in 2004. For a long time, the magazine was one of Russia’s last remaining authoritative, independent publications which investigated oligarchs close to the government (disclaimer — The Bell founder Elizaveta Osetinskaya was editor-in-chief of Russian Forbes between 2011-2013).
  • After the change of ownership at Forbes, there was already one scandal and even a court case from a former correspondent. But, a huge scandal only erupted this week. After receiving the new issue of the magazine from typography, the editorial team found that during printing, one of the issue’s main articles had been removed from the magazine. The article was about the businesses of arrested billionaire Ziyavudin Magomedov. The reasons why the article was pulled are still unclear, but this was an unprecedented move at a well-respected Russian media publication. Forbes’ editor-in-chief filed a complaint with the General Prosecutor (this might sound surprising, but if the owner of a media publication involves himself in editorial decisions in Russia, this is actually illegal). In response, Forbes first saw its electricity cut off, and then journalists lost their access to the editorial system. By the evening, there was an announcement that the new acting editor-in-chief will be the former editor of the Forbes glossy lifestyle supplement.
  • After the change in the editorial team, the magazine will in all likelihood finally stop being a reliable source of information about Russia. So far, there has been no official reaction from the U.S. version of Forbes to the unprecedented (even by Russian standards) conflict. In a similar situation in Ukraine, after the editorial team quit in protest over the arbitrary behavior of the owner, and the local edition of Forbes subsequently lost its license.

Why the world should care

The history of Russian Forbes is the most visual illustration of the fate of privately owned publications in the new Russian reality. Due to new legislation, media owners are non-core investors, and are not interested in high quality content or adhering to professional standards. Now, they are simply destroying what is left and doing so without a word of protest from the Kremlin.

4. A Russian programmer might be the owner of one of the world’s largest bitcoin fortunes

What happened

We already wrote about how Russian billionaires fell in love with investing in bitcoins. A habit from the 1990s, they tend to be attracted to risky investments promising high returns. We don’t know which member of the Russian Forbes list has the largest holding of bitcoins. But this week, we learned that an unknown Russian could claim to be one of the top 3 holders of cryptocurrencies globally, according to Forbes. In 2011, he mined, while at work, half a million bitcoins, worth over $4 billion at today’s valuation.

  • The hero’s name has not been revealed. He was able to mine such an amount of cryptocurrency as a result of his work for the company Qiwi, which manages Russia’s largest network of 175,000 electronic payment terminals, which Russians used to pay for mobile services, internet and other bills when online banking wasn’t sufficiently developed. These payment terminals were in every, even the smallest, grocery store in Russia. In 2011, the company’s employees noticed that the load on the devices wasn’t going down at night. An investigation uncovered that one of the company’s programmers put an application on the terminals to mine cryptocurrencies and was able to mine 500,000 bitcoins. At that moment, this was the equivalent of roughly 6% of the total bitcoins in circulation, then valued at $5 million. Today, half a million bitcoins would be worth $4.13 billion.
  • Qiwi’s founder and CEO, Sergey Solonin called the programmer and demanded that he return what he had mined, but the programmer simply quit his job. There was nothing to formally file a case in court against him with — the company didn’t suffer, because the stores paid the electricity bills. After this, Qiwi employees tried to download the application again and continue to mine, but by that point the process was too complicated for their equipment. The traces of the secret bitcoin billionaire end there — but Russian cryptocurrency specialists have already connected him with the secret, largest ever recorded transaction of 500,000 bitcoins, which took place in 2011.
  • Qiwi claims that the programmer did not become a billionaire, and that his bitcoins “were lost”, but how exactly is unclear. This might actually be true — in the entire history of the bitcoin, up to four million coins (20% of all coins outstanding) were irretrievably lost. But if the programmer didn’t lose his coins, then now he is among the top 3 crypto billionaires in the world according to the Forbes list, ranking above even the Winkelvoss twins. If you look at the ordinary Russian Forbes list, then the programmer would be ranked 28th, with net worth greater than that of the founder of Russia’s largest retail chain, Magnit, Sergey Galitsky.

Peter Mironenko

This newsletter is made with the support of the Investigative Reporting Program at UC Berkeley.

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