Member of the Russian Federation Council Alexander Verkhovsky is one of the major fishery managers of the country. He achieved success due to such things as the shadow export, licensed poaching and price fixing.
The Kuril Islands are generally known for a fact that Japan lays claims to them time and time again. However, the Kuril Islands are one of the key areas for the fishing and fish processing industries of Russia. Member of the Federation Council in the Sakhalin region Alexander Verkhovsky knows this better than anyone else. On the Kurils, he owns more than 23 companies, including fish catching and fish processing enterprises, like Bank Iturup and others. Most of them are integrated into a holding company, headed by Gidrostroy Closed Joint Stock Company. On Sakhalin, Verkhovsky has little to no competitors, while the Kuril Islands have been his personal foothold for a long time. Although all businesses are in his confidential management, the fish king’s income declaration is sufficient evidence of his profits. It includes multi-million dollar revenues, a villa in Italy, and a luxury apartment in Moscow. The Gidrostroy holding is almost the only contractor for construction projects within the federal grant program "Social and economic development of the Kuril Islands." The way Gidrostroy is winning tenders and builds objects for personal use on budget money deserves a separate topic for discussion. For now we can be content with talking about the fish business of the Sakhalin senator.
All is fish that comes to his net
Verkhovsky’s fish empire grew largely due to the historical principle of the fishing quotas distribution. In essence, it is a long-term fishing license. This distribution principle began to operate in 2004. First, the quota was provided for five years, but soon this period doubled. To support the fishing industry, they tried their best, but we know the rest. The authorities tried to stimulate the whole industry, but ended up stimulating only individuals like Verkhovsky. Why is it that our grocery shelves are filled with re-frozen Chinese fish? The answer is simple: our products are exported.
In late 2012, the Russian Federal Antimonopoly Service found out about a pollock cartel (collusion of major players in the industry). Alexander Verkhovsky played the first violin in this case. The cartel consisted of Verkhovsky’s Pilenga CJSC, as well as the Ostrov Sakhalin CJSC, affiliated with the Gidrostroy holding. A non-profit organization, Pollack Fishing Association, coordinated the cartel. This association included three of Verkhovsky’s companies - Pilenga, Poronay, and Sakhalinrybaksoyuz. Besides, the senator was also one of the key members of the association. According to FAS, the cartel was founded in 2006 and worked until the end of 2010. In 2007-2009, the cartel members kept shipments of pollock to the Russian market at 60-70 thousand tons. Fishing quotas were on the rise for that whole period, as was the volume of exports. The main buyer of the exported pollock was Pacific Andes International Holdings Limited (Hong Kong).
The Pacific Andes holding controls a number of companies not only in Hong Kong but also in China, Japan, Peru, and the United States. Additionally, the FAS staff detected fish exports to China and Korea at low prices. All of the goods were sold under fictitious transactions with offshore companies. Then the products were resold in China and Korea at market value. The profit was transferred to accounts of the offshore companies, which were allegedly controlled by Pacific Andes.
The antimonopoly service stated that Pollock Fishing Association and other cartel members violated art. 11 para. 1 subpara. 4 of the Law on Protection of Competition. Representatives of the association and other cartel members challenged the decision of FAS, but the arbitration courts took the side of the antimonopoly agency. Sadly, the taste of this victory turned bitter. In 2012, during the sales production at London Stock Exchange, Pacific Andes said it controlled about 60% of the Russian fisheries in the Far East. Pacific Andes controlled more than 20 fishing companies throughout the Far East, the FAS later confirmed. All these companies have quotas for herring and cod species fishing until 2018.
About pollock from China
Forced holdback of pollock supply to the domestic market led to a shortage of products. This deficit is not a huge one, because part of the exported pollock returns and, obviously, will return to Russia. In the same 2012, when FAS uncovered the cartel, Acting Head of the Federal Service for Veterinary and Phytosanitary Surveillance (Rosselkhoznadzor) in the Primorsky Region and the Sakhalin Region, Eduard Moon, tried to draw the attention of law enforcement officers to the catastrophic situation with exports and the return import of fish in the Far East. In a letter to the Deputy Prosecutor General for the Far Eastern Federal District Yu. Gulyagin, Moon wrote that the fish exported to China returned to the Russian market in the form of frozen pollock fillets, crab sticks, dried fish, etc. At the same time, all products were generously spiced with frosting and polyphosphates that retain moisture. For instance, those pollock fillets contain up to 40% glaze, which means that both distributors and end customers in the stores have to pay for water instead of fish.
Photo: letter of Eduard Moon to the deputy prosecutor general Gulyagin
Moon also wrote to the prosecutor’s office about specific companies, which export fish to Asia. His information coincides with the conclusions of FAS about the pollock cartel.
Photo: Table 3. Companies that use only offshores for the export of their products
Eduard Moon also tried and failed to report about the pressure on Rosselkhoznadzor management in the Primorsky Region from the administration of currently arrested governor Khoroshavin, who had long been friends with senator Verkhovsky. Before the Rosselkhoznadzor management in Primorsky Region was created, the fishery products design for export was performed by the Natsrybbezopasnost federal state enterprise. Natsrybbezopasnost had close ties with the Gidrostroy holding. The 5i and health certificates, required for exporting products, were filled without inspection, simply on the basis of data provided by fishing companies.
Still, we should not blame Gidrostroy for exporting low-quality products, though the quality control stage was entirely absent. This kind of simplification pursued different goals. Machinations with certificates are a part of the standard disinvestment scheme. A Russian company executes a 5i certificate on the basis of a false contract with an importer from Korea or China. This way the Russian fish finds its way easily into the Asian ports. In this case, a health certificate for the products is simply absent. When the fish is already abroad, the same Russian company sells it on the stock exchange for a completely different price and then issues a health certificate for the real buyers. The profit received by the Russian company then goes directly to offshores.
Rosselkhoznadzor tried to fight Verkhovsky’s favored strategy. The agency sent a specialist to one of the shady dealers’ favorite places in the Far East – the Korean port of Busan. There, the certificates were issued on the spot, with the visible examination of products. All of that knocked the dealers of their stride. It did not take long before discontent started to grow. "To influence the management and interrupt its work, the abovementioned unscrupulous companies headed by G.S. Zverev (Pollock Fishing Association President German Zverev), which have significant financial resources, put pressure on officials of state bodies and local self-government, aiming to ensure the uncontrolled circulation of fish products," Eduard Moon said, as quoted by Novaya Gazeta. In fact, both Rosselkhoznadzor and the Federal Antimonopoly Service lost in the fight against the oligarch and senator Alexander Verkhovsky. Since January 1, 2016, the Law of the Russian Federation from May 14, 1993 № N4979-1 "On veterinary" allows to issue veterinary documents to persons who are not employees of the bodies and institutions belonging to the State Veterinary Service system. For this they only have to pass a performance review. The certified specialists can draw up documents only on items from the federal list. Luckily for them, the list includes commercial fish. Now the captains of fishing vessels can sign tolerance for export all by themselves, without even approaching the shore.
Verkhovsky is a highly practical person. All that is not associated with immediate profits, is of little interest to him. Ecology is one of such things. The senator’s companies are actively using the innovation of the Sakhalin Research Institute of Fisheries and Oceanography (SakhNIRO) – the fish inventory barriers. They are metal bars overlapping the riverbed, which block the way for the fish headed for spawning.
Photo: Verkhovsky's companies actively use the fish inventory barriers
In theory, these barriers are a means of combating suffocation. That is what SakhNIRO calls the death of the fish population, caused by overfilled spawning grounds. Simply put, the scientists think that there is too much fish, and it may die from oxygen starvation. In response, Head of the Environmental Watch on Sakhalin organization, Dmitry Lisitsyn, says that the pre-breeding death of salmon, which SakhNIRO likes to use as an example of suffocation, is absolutely natural. Otherwise, the fish would have died out long before the scientists started installing their barriers.
However, the fishery managers were eager to appreciate the new invention. Since 2009, the barriers have received a wide acclaim in the Sakhalin Region. After all, when the river is blocked by this barrier, it creates a real fish jam. There is even no need to catch these valuable breeds of salmon – just reach out and take them, it is as easy as for a child to pull out a candy from the bowl. Provided the fishermen’s appetites are bigger than those of children. Federal quotas are not enough to satisfy their hunger, and that is when regional quotas help.
For example, the Sakhalinrybvod federal state institution leased fishing grounds to Verkhovsky’s companies for a period of 20-25 years, Novaya Gazeta reported. These grounds are yet another innovation of the Sakhalin area, and in total Verkhovsky received more than 750 square km. of them. At the same time, there is no such thing as a fixed rental rate for these grounds. The lessee pays as much as he is required to. Friends of the imprisoned governor Khoroshavin got off cheaply. That is why in his twenty years of reign on the Kurils and the Sakhalin, Verkhovsky paid 300-500 thousand rubles, i.e. 15-25 thousand per year of lease.
The volume of quotas for the fishing king is also impressive. In 2015, a total of 42.5 thousand tons of regional quotas were given for just two of Verkhovsky’s companies (Kirov Fishing Kolkhoz and Kurilsky Rybak). Two years earlier, the volume of quotas for these companies amounted to 38 thousand tons. The quotas are issued by the anadromous committee of the Sakhalin region (a branch of Rosselkhoznadzor). It also issues permits for the installation of the barriers. Needless to say, Verkhovsky obtained the right to install the barriers in six rivers. By the way, the industrialists do not pay a penny for this innovation. After all, they are saving the fish from extinction.
Since 2011, with Khoroshavin’s active participation, a total of 30 fishing grounds in 28 rivers were created in the Sakhalin Region. At the time, over a thousand people in Yuzhno-Sakhalinsk set up a rally against the creation of barriers and fishing grounds. As usual, Khoroshavin ignored the public outcry. Environmental organizations in the region also keep sounding the alarm. The above-mentioned Sakhalin Environmental Watch even achieved some success in dealing with local authorities, who legalized poaching. In 2014, the environmentalists managed to invalidate Khoroshavin’s decision to create additional 12 fishing grounds. Former governor did not accept defeat and wrote a letter to the Prosecutor General’s Office, condemning the leader of environmentalists Lisitsyn. Khoroshavin’s statement represents a shining example of soviet grassing – he claimed Lisitsyn sided with external enemies and US President Barack Obama personally.
Photo: Khoroshavin's letter to the Prosecutor General's Office
Full text of the letter can be read here.
However, the results of fishing for the recent years only prove that Lisitsyn was right. Since 2008 to 2012, the young wild salmon population dropped by more than threefold, from 2.27 billion to 400 million units. In 2013, the SakhNIRO scientists came to their senses and recommended to let all the fish to their spawning grounds, which meant to completely abandon the idea of barriers. But the anadromous committee not only refused to listen to the advice, but also created special conditions for Verkhovsky’s fishing companies. Quotas for the senator were twice as high compared to the regional average, and the allowed period of fishing was increased for another month, all for Verkhovksy. As a result, the salmon, whose life cycle is two years, simply did not came to the shores of Sakhalin and the South Kurils for spawning in 2015. Many fishery managers call this a catastrophe. "All these barriers, fishery plants, conditions for the licensed poaching... Simply strangled a key source of our salmon – the natural reproduction in the rivers. Here’s your result," the chairman of the Fishermen Association of the Smirnykhovsky district Vladimir Smirnov told PrimaMedia.
Finally, in the fall of 2015, under Russian President Vladimir Putin’s direction, at a meeting of the State Council on Development of Fishery Industry, it was decided to increase the period of validity for federal quotas to 15 years. The government has already received relevant instructions. This means Verkhovsky will not lose. Rather, he will be the winner like always.