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Looting Ukraine or why this is not Putins fault this time

This white paper by Oliver Bullough Looting Ukraine: How East and West Teamed up to Steal a Country from the Legatum Institute should be required reading for anyone that is currently mired in the illusion that the unfortunate war in Ukraine has anything to do with Russia. Yes, Russia has been corrupt to the core post-soviet-breakup which Putin has yet to correct. He has managed to corral some of Russia’s oligarchs to minimize the damage they do, but the origins of the corruption lie in the west, in it’s banks and holding companies and its refusal to deal with the vast industry of money-laundering.

It’s evident that the Maidan protesters did, indeed, have a legitimate gripe, and it appears that while they wanted the extraordinarily corrupt Yanukovich out, their goal was elections, not a neo-nazi coup. Their protests were opportunistically hijacked by US agents using the most disruptive available local force, which happened to be neo-nazi groups of Svoboda and Pravy Sektor militants. The US has never been particularly fussy about the quality of its puppets, unfortunately.

The paper outlines the history of corruption in the Ukraine, mentioning Yuschenko’s failed attempt to clean it up, and incidentally clarifying why Putin has had to resort to the “keep thine enemy close” approach rather than trying to eliminate the Russian oligarchy entirely.

Some interesting bits:

Ukraine’s energy poverty should logically have inspired its new leaders to push hard for fuel efficiency and to negotiate import contracts carefully. Instead, Ukraine’s economy became more dependent on energy through the 1990s. By 2013, Ukraine was one of the least efficient users of energy in the world. It used 30 times more power for each dollar of GDP than Japan, almost twice as much as Russia, and more even than Iraq.

In practice, Ukraine’s stop-start approach to reform left it stranded between capitalism and communism, in a zone where insiders could arbitrage between regulated and non-regulated prices and make fortunes which they kept offshore.8 The country lost out, but the insiders—later known as oligarchs—profited. It was thus in their interests for Ukraine’s economy to remain as inefficient as possible. Ihor Bakai, one of the insiders of the 1990s, noted in 2001 that “all major political fortunes in post-independence Ukraine were made on the basis of Russian oil and gas”.

Among the beneficiaries of this system was, for example, EuralTransGas10—a company owned by Dmitry Firtash—which in 2002 won a contract to supply 36 billion cubic metres of gas to Ukraine from Turkmenistan. The deal gave Gazprom $470 million in transit fees. ETG was paid in gas, receiving 13.7 bcm to sell on its own account. That was worth up to $1.5 billion on the European market. ETG was one of a number of companies (it was preceded by Respublika, then Itera, and succeeded by RosUkrEnergo), which fulfilled the same role. All of these companies acted as intermediaries between Russia and Ukraine, making vast profits, despite the fact that an intermediary was entirely unnecessary.

The citizens of Russia, Ukraine, and Turkmenistan would have been better served by direct government-to-government arrangements, since all the energy companies involved were state-controlled. However, the deals were not intended to secure the best price, but rather to enrich the handful of individuals with access to them. They diverted resources away from Gazprom, Ukraine’s Naftohaz, and Turkmenistan, and into the pockets of the companies’ patrons. The people who ran these companies were connected at the highest levels in Kiev and in Moscow, and the profits they made guaranteed Ukraine would do nothing substantive to make itself less energy-dependent, despite lacking large energy reserves of its own.

Nevertheless, the West provided legal residence for these intermediary companies. ETG was based in Hungary, and banked with Austria’s Raiffeisen Bank, which held RUE’s shares. But there are many other jurisdictions—including the Netherlands, the United States (Delaware), Austria, Switzerland, the Channel Islands, and the United Kingdom, as well as the more well-known ‘sunny places for shady people’ that we think of as tax havens—that have touted for ex-Soviet business. Keeping the money offshore allowed the intermediaries to escape both Russian and Ukrainian taxes. Offshore financial channels allowed corrupt individuals to move their gains out of Ukraine and to enjoy the West’s property rights, while continuing to exploit their positions inside Ukraine to enrich themselves. Ukraine’s rulers have had no need to build a stable system at home because Western countries have been willing to sell them theirs.

And money-laundering:

To extract illegal money from Ukraine, Russia, or anywhere, and transform it into legal money offshore, requires ingenuity. In recent years, several Western companies have proved happy to establish the legal vehicles required.

One such vehicle is Astute Partners, the vehicle through which Yanukovich concealed his ownership of Sukholuchya, his hunting estate. It was a British “shell” company created in 2004 and kept in readiness by a Trust and Company Service Provider (TCSP) for the day when someone might want it. On September 3, 2009, someone did indeed want it, and the director and owner changed from being “Nominee Director Ltd” to Reinhard Proksch, who could conceal the company’s true ownership behind attorney-client privilege.

Because Yanukovich was designated a politically-exposed person (PEP), anyone conducting business with him was legally obliged to do extra due diligence and check that the money or assets involved were not tainted. Proksch has insisted he has all the documentation at his office. “I am not a crook,” he told Reuters in February 2014, shortly after Yanukovich was ousted. “I really think that we have done nothing wrong… I’m really looking to sort it out.” He has since denied any connection to Yanukovich, telling an Austrian newspaper that Blythe and Astute belonged to “a Dubai-based Russian investor”.

If Proksch did indeed decline to do business with Yanukovich, others would have stepped in, however. Navimax Ventures Ltd, a British company through which the president owned three palaces in Crimea, as well as a coal producer in the Donetsk region, was created by A1 Company Services. Its director is Fynel Limited (Cyprus), which is in turn managed by Latvian nominee Stan Gorin.

These kinds of structures have several advantages. First, the sheer number of jurisdictions—Ukraine, UK, Nevis, Austria, Cyprus, and Latvia, as well as others hidden behind secrecy jurisdictions and nominee directors—complicates any potential investigation. Second, the “British” ownership gives both a veneer of respectability and access to UK courts. Third, ownership via Nevis or a similar jurisdiction makes it impossible for any future investigator to find information on beneficial ownership since registers there do not ask for it, and therefore do not have it. Fourth, Cyprus and Latvia have long-standing experience of dealing with
former Soviet clients, and their bankers and directors have a reputation of waving through Know-Your-Customer requests without serious checks.

A whole industry thus exists to provide clients with companies nested through several jurisdictions, without asking questions about what those companies will be used for. A World Bank study published last year laid out a “three layer test” for offshore structures. Since there are rarely commercial reasons for complicated structures, the bank suggested that any company with more than three layers should be subjected to heightened checks to see whether it is hiding money or obscuring ownership. Some of the structures Yanukovich employed had five layers before they even got beyond a secrecy jurisdiction, and should have raised concerns anywhere they did business.

It is probably unnecessary to note the dearth of financial sector prosecutions of the endlessly-documented crimes committed in the lead-up to the crash, but the author of this paper heroically suggests:

Western countries could also be far more proactive in prosecuting foreign companies that have engaged in corruption in Ukraine. Forcing them to clean up their acts would give not only an example of best practice, but would also put pressure on the Ukrainian government to enforce its own laws properly. If local companies did not have to abide by the same rules, foreign firms would be at a disadvantage.

The most important assistance that could be given to the peoples of the former Soviet Union, however, would be to prevent their leaders using Western countries as repositories for their stolen wealth. International guidelines already exist to implement this.

If TCSPs, banks, lawyers, and other foreign professionals applied AML regulations as zealously towards post-Soviet kleptocrats as they do towards potential terrorists, then the whole system that has maintained chaos and corruption in the former eastern bloc would collapse. As it stands, however, Western investigators show no interest in investigating proactively, and thus the kleptocrats have few grounds for concern.

It appears the UK may be especially interested in maintaining the status quo:

In May 2013, lawyers acting for Hermitage Capital sent the British Revenue Service a packet of documents alleging wrong-going by GSL, a British TCSP (Trust and Company Service Provider), which set up the companies used to launder taxes paid by Hermitage in Russia. These taxes were illegally claimed as refunds by officials (in the case that led to the death of Sergei Magnitsky). The documents alleged not just GSL’s involvement in creating the companies, but also its attempts to frustrate the investigative process in a civil case brought by Hermitage, and in failing to fulfil any of the AML requirements. The only response Hermitage received was a pro forma. “We have gone all over the world filing criminal complaints about the money laundering in the Magnitsky case. The only place where we have hit a stone wall of inaction is the UK,” said Bill Browder, of Hermitage Capital:

“By not acting, the British authorities are giving the green light to money launderers and organised criminals, and it’s impossible to do anything about it.

Protecting corrupt western financial institutions are not the entire story, of course. The Dutch have their interest in the Donbass gas field, already leased to Royal Dutch Shell; which requires that the land be “acquired” from the people who have been resisting fracking there, quite reasonably, since it’s all limestone which will dissolve and collapse.

And the US has gas to sell to Europe. Cutting the ties between the EU and Russia is a primary goal, leading to fresh Cold War rhetoric and what appear to be attempts to provoke Russia into a reaction that would justify all-out war. There have been some fairly disturbing statements to the effect that such a war with Russia might be “winnable” turning up in social media, as well.

And who are the main actors in the MH17 investigation? The Dutch and the UK, who are now in possession of the black boxes and, perhaps, the tower tapes. Since both have dogs in this fight, their participation in the investigation must be regarded as highly suspect.

Russia has been, in reality, practically dormant in this whole affair. There has been no credible evidence of any direct involvement outside of turning a blind eye to volunteers crossing the border, and taking care of the 750,000 refugees that have flooded into Russia. And the infamous western sanctions that the EU has so inexplicably caved to are strengthening Putin politically, while weakening his oligarch opponents, who are the ones benefiting most from those ties to the EU.

Given the inescapable picture of irresistible global financial power that has been demanding that nations everywhere literally starve their people to the last pound of flesh–Greece, Argentina, et al–protected by the military might of the US-led NATO, it’s very hard to see how the Ukraine can possibly benefit from alignment with the EU. Until the governments of the US and EU deal with their own corruption, they cannot help Ukraine.

This one, I’m afraid, just can’t be blamed on Putin this time.

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