Tunnelling Wealth To Vladimir Putin

Paul Gregory Research Fellow, Hoover Institution
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As Vladimir Putin goes over the top (allowing kidnapping of OSCE observers in Ukraine) and his disregard for Barack Obama becomes more obvious (putting Edward Snowden on his annual talkathon), the media has become more curious about Putin’s secret wealth. The New York Times’s 2,000-word feature, “Sanctions Revive Search for Secret Putin Fortune,” covers what we know about Putin’s hidden wealth, estimates of which range from 10 to 70 billion dollars.

In the first round of sanctions announced on March 6, the Department of Treasury targeted, among others, Gennady Timchenko, one of the two founders of the Gunvor commodities trading company and currently the world’s sixty-first most wealthy individual. Timchenko is a citizen of Finland, who lives in Switzerland.

In its sanctions announcement, the treasury department asserted that “Putin has investments in Gunvor and may have access to Gunvor funds.” The definitive tone of this short statement creates the impression that the treasury knows what it is talking about.

I proposed sanctioning Timchenko in a Forbes blog dated March 3, arguing that as a Finnish citizen he could be questioned in Finnish or European courts. This post elicited an almost immediate e-mail response from a Seth Pietras, who identifies himself as Corporate Affairs Director, Gunvor Group. Mr. Pietras stated he wanted to “offer some clarity on the matter” and to assure me that any rumor about Russian President Putin “hiding” wealth in Gunvor, “has no basis in reality.”

Pietras puts forward Gunvor’s history of low profits as proof that rumors of Putin’s financial interest in the company “have no basis in reality.” He cites as a “mathematical improbability” that Putin could accumulate “significant hidden wealth” from a company that “over its entire 14 year history has only generated a total, aggregate net profit of approximately USD $4 billion.” Given Gunvor’s investment and liquidity requirements, “there is nothing to hide.”

Gunvor, like many commodities traders, is privately held and has limited reporting requirements, but its offering of bonds on the Singapore exchange brought forth a preliminary offering circular that describes the company’s operations and its financial results.

The circular shows 2012 gross revenue of $94,146 million, a cost of sales of $92,398 million, and a gross profit of $747 million. Pietras is correct: Gunvor’s profit rate is a low eight tenths of one percent. Indeed, Gunvor nets precious little from its almost one hundred billion in revenue.

The circular also lists under assets Gunvor’s fifty percent interest in the Novorossiysk Fuel Oil Terminal. For those who do not know, the Novorossiysk terminal is the epicenter, through which the bulk of Russian oil exports flow after transiting the Transnet monopoly pipeline. He who controls Novorossiysk, in effect, controls Russian oil. It is a fair question to ask how a company born in 2000 managed to obtain half ownership of the choke point of Russian oil exports?

Anyone familiar with Mafia casino skimming, kickbacks on government construction projects, or off-the-books work understands that revenue and cost streams of nearly $100 billion conducted through a long chain of producers, intermediaries, traders, and final users offers a cornucopia of opportunities for skimming, kickbacks, and other types of corruption, which can be concealed from prying eyes.

Nobel laureate, Joseph Stiglitz, referred to these practices as tunneling the value out of companies, which he observed aplenty in Russia and Central Asia as the World Bank’s chief economist. Indeed, one result of tunneling is low profitability. Indeed, Gunvor’s eight tenths of one percent profit rate does appear low relative to its two closest rivals (Glencore Xtrata, 2.8 percent and Vitol average 1.5 percent).

If Gunvor’s owners tunneled just one percent of revenues and one percent of costs, they could build up a secret slush find of $25 billion over a fourteen year period. Given the murky nature of Russian oil trade, one percent may be a minimal level of tunneling.

The writers of the New York Times feature seem puzzled why Putin would run the risk of accumulating a secret fortune that would make him among the richest men in the world. After all, he has government planes, palaces, limousines, and every other luxury at his disposal (including $80 million in watches). Even to ask this question reveals a lack of understanding of Putin’s Russia. Putin and his inner circle live in fear of a “Russian Spring” that could unseat them when they least expect it. They cannot place their fortunes in Russia with its lack of rule of law. A deposed Putin living in Switzerland would require a king’s retinue of guards, cronies, and servants. He would need to pay huge sums of protection money. He would not be caught, like his deceased rival, Boris Berezovsky, depressed in his English manor, down to his last $10 million.