No competition. Plundering of Russian Railways 

No competition. Plundering of Russian Railways

The Russian transportation state corporation wallows in corruption and embezzlements of budget funds. In particular, the governmental acquisitions – most of which are noncompetitive – are the main mechanism used in numerous financial scams.

Multibillion contracts of the state company are awarded every year to the came contractors – either partially owned by Russian Railways or hiding their main beneficiaries in offshore zones. Radio Liberty journalists have uncovered details of the smoothly running acquisition scheme used in the largest governmental company.

The Federal Law № 223 “On acquisitions of goods, works, and services by certain types of legal entities” regulated purchases of equipment and ordering of services and contract works by the Russian Railways. According to the Law, the acquisitions must be transparent, the funds must be spent as per their intended purpose, and goods and service providers must be selected on a competitive basis through tenders.

It turns out, however, that in most cases no tenders had been held.

One law for the rich, and another for the poor

People handling governmental acquisitions for the Russian Railways get around tendering procedures by using holes in the legislation. The customer can hold tenders in any form convenient for it. Interdepartmental regulations – based on the standard Acquisition Regulation – have been approved and signed by the management of the state corporation. 

Russian Railways has added to its interior Acquisition Regulation a paragraph allowing not to hold bidding contests and tenders in exceptional cases. This clause enables the organization to make acquisitions as per directions from its managers of any rank – from the President and Vice Presidents to heads of branches and structural subdivisions.

And the managers give such directions all the time. Only in 2015, economic subdivisions of the Russian Railways have signed “in exceptional cases” 53,483 contracts for the total amount of 88.7 billion rubles.

In the period of January–August 2016, the company has spent 79.5 billion rubles for various purposes by awarding 30,689 noncompetitive contracts.

Million and half for flowers

The Central Directorate for Infrastructure (CDI), the largest division of Russian Railways responsible for the technical condition of railroads, is the leader in noncompetitive acquisitions. All types of works ever performed for Russian Railways, as well as any kind of supplies and acquisitions, can be found among contracts signed without any tenders in exceptional cases. 

For example, major contracts for construction of new transit hubs and capital renovations of infrastructure are being awarded to the sole contender, without exploring possible alternatives. In the current market situation, should the company hold tenders for such large-scale projects, hundreds of millions could be saved on each contract. Especially taking that the net debt of the company has increased in 2015 by 8% and reached 899.6 billion rubles, while its annual operation expenses raised by almost 10% and amounted to 1 trillion rubles. 

Not only complicated construction works are being outsourced. Based on the signed contracts, there are no skilled specialists, able to produce required paperwork, among 925 thousand Russian Railways employees (as of the beginning of 2013). Therefore, the company has to seek exterior assistance.

For example, in 2013 the Russian Railways retained Erta-Consult Closed Joint Stock Company (whose staff, according to SPARK-Interfax, is only 5 people) to produce documentation for the Ministry of Energy of the Russian Federation and paid 11.8 million rubles for this work. In the next year, Erta-Consult agreed to provide the same service for only 6 million rubles – apparently, the volume of the documents was half as much.

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Vladimir Yakunin and Aleksander Tselko 

The contracts had been signed as per instruction of Aleksander Tsel’ko, the former Vice-President and the Head of the Central Directorate for Infrastructure. He also ordered to retain NIIAS Open Joint Stock Company to prepare documentation for the Board of Directors of Russian Railways Open Joint Stock Company and pay it 11 million rubles for this job. According to the documents, CDI is very generous when it comes to the optimization of its performance. 

In 2014 the Board of Directors has paid 29.7 million rubles for the CDI Process Model developed by MCD Partner consulting company in 9 days. It is necessary to note that by that time, the Central Directorate for Infrastructure had been already functioning for almost 3 years, and this task was, in fact, performed for the second time – a year later, the same consulting company had already done a similar job for the Russian Railways at the cost of 23.6 million rubles.

In order to optimize its management techniques, CDI decided to select a contractor on a competitive basis – Mosgiprotrans Design and Survey Institute Joint Stock Company has been chosen and received 196.5 million rubles for this work.

Office furniture for the CDI management supplied by Roszheldortrans in the same year was much cheaper (41 million rubles), while flowers (nothing human is alien to the Russian Railways management) purchased in 2014 from Proftekh Company Closed Joint Stock Company had cost only 1.5 million.

Undercover work

According to the journalistic investigation, most contractors retained by the Russian Railways on a sole source basis are dummy companies created to siphon huge amounts of money off the budget through shady schemes. 

An anonymous source in the Russian Railways told that companies retained as contractors often consist only of a director and senior accountant, while the contracted works are either not performed at all or performed by the Russian Railways staff, using equipment of the state corporation, and at artificially high prices.

From the documentation point of view, vulnerable points of the signed contracts are, when possible, covered. Although the paperwork procedures used to be violated and are still being violated for certain purposes.

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Vladimir Suprun 

Most directives to retain a contractor on a sole source basis are not signed by CDI management. Vladimir Suprun, the Head of the Directorate, and Vice President Aleksander Tselko – who were dismissed immediately after the resignation of Vladimir Yakunin, former President of the Russian Railways, in 2015 – avoided signing such documents and only affixed the seal of the Department for Document Support.

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Unsigned directive from A. Tselko 

Aleksander Margiev, the former Head of the Department for Contracts and Legal Affairs of CDI, – who was fighting corruption in the state corporation and ultimately dismissed with scandal in 2014 – explained this primitive trick by their cautiousness: this was a precautionary measure should law enforcement authorities start looking for persons responsible for large-scale violations and larcenies. No signature – no proof that the management had sanctioned abuses that were truly widespread in the last years of work of Tselko and Suprun. According to Margiev, contracts submitted to Suprun for singing had been enraging him.

“Bona fide contractors”

The tradition to award multimillion contracts to the same dummy companies year by year required at least some justification. 

According to the Acquisition Regulation, the customer must rationalize its preference for a certain company as a sole provider of goods or services. 

Explanations of Russian Railways officials – if any – were not very convincing. In most cases it was: “The company has proven itself as a bona fide contractor”. A remarkable example is Ametist production company, which used to organize corporate parties and festive events for the Central Directorate for Infrastructure personnel for a number of years at the cost of dozens of millions of rubles.

According to the Russian Railways Acquisitions Plan for the year of 2013, selection criteria for companies chosen as sole contractors were mostly limited to experience in performing similar works. In some rare cases, a stretch of imagination allowed railroad officials to add something like: “meeting Terms of Reference requirements” or “performance quality and promptness”.

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It is glaringly obvious that most contractors chosen by the Russian Railways on a sole source basis were based in Moscow and the Moscow region. Amounts spent on paperwork preparation, development of techniques, or licensing often exceeded budgets allocated for purchasing fuel and lubricants or railcar replacement parts in a big region.

Ultimately the CDI management has eliminated even such a formality as signing a new contract after the expiration of the old one.

On April 1, 2013 Aleksander Tselko signed a directive to prolong contracts signed by the Directorate in 2012 (this directive is missing on the Russian Railways web site). It was explained by the anti-crisis plan of the Russian Railways and the need to cut costs. There was absolutely no connection between the anti-crisis plan and prolongation of contracts – but the orders are peremptory, and some 300 contracts had been extended automatically. The three months of idleness – during which no works were performed for most contracts (including maintenance of rolling stock and cleaning of thousands of railcars) – haven’t been taken into account.

Pardon impossible to execute

Mass violations in the Russian Railways committed for so many years could not be unnoticed by law enforcement authorities. The police had inquired many times about artificially high prices for certain works paid by the state corporation and discrepancies between signed acceptance certificates and actual results of work. 

However, according to Aleksander Margiev, the former Head of the Department for Contracts and Legal Affairs of CDI, Russian Railroad officials had always provided a standard response to such inquiries: the damages were either deemed insignificant or already compensated. 

Contractors were returning the embezzled money at the first sign of alarm – in order to prevent uncovering of other crimes – and the criminal cases had not been initiated. According to Margiev, paying money for unperformed works by the state corporation was not considered – contrary to Article 20 of the Criminal Procedural Code of the Russian Federation – corpus delicti. 

However, in most cases, dirty linen was not washed in public. Audits of enormous spendings in Russian Railways had been performed by Zheldorcontrol – an internal control department directly subordinate to the President. Numerous abuses and larcenies had been found, but the scandalous situations – sometimes, involving billion-ruble damages – were settled internally. 

For instance, it was found out that during the implementation of an upgrade and modernization project for maintenance vehicles in 2012, equipment supply schedules had been disrupted – and, as a result, only 60% of the contracted works have been actually performed. Supervisors from Russian Railroads were signing fake acceptance certificates, moneys were paid to the suppliers, but the equipment ordered by Russian Railroads was not supplied. 

Then it became known that the total amount of signed unreliable certificates was almost 2 billion rubles, while the total cost of incomplete and non-operational equipment supplied according to fake bills of receipt was 302 million rubles. Following an audit conducted by Zheldorcontrol, Vladimir Vorobiev, the ex-Vice President of the company, has convened a conference.

Recovery of losses has not been discussed at all at this conference, but some reprimands and scoldings had been given to persons responsible for the inefficient use of funds. The source in the Russian Railways noted that normally such stories do not result in dismissals. The offenders could be demoted and transferred to another department – where they are promoted again to the same rank shortly after.

It is necessary to note that all the examples above are not isolated cases. This is an unspoken attitude of the Russian Railways towards budget funds – a long-term tradition created during the ten-year rule of Vladimir Yakunin – predecessor of Oleg Belozerov, the current President of Russian Railways.

Legacy of Yakunin

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Vladimir Yakunin became the President of the Russian Railways in 2015; he started working in this company two years earlier, as the Vice President for Finance. An experienced transportation manager, he had become involved with railroads even before joining the Russian Railways – for a year he was the Deputy Minister of Communication Lines.

During his rule, the company – established in 2003 – was steadily increasing its profits for some time (from 8.8 billion rubles in 2004 to 10 billion rubles in 2005 and 2006). But then the situation has suddenly changed, and by the end of 2014 the low, but stable, profit turned into a loss of 99.3 billion rubles, while the total debts, including credits and loans, have reached almost 800 billion rubles. Main creditors of the Russian Railways are Sberbank, Deutsche Bank, and VTB Bank. 

After 10 years of ruling the national railroad operator, the President of Russian Railways has became famous countrywide – very few high-ranked officials could pump multibillion subsidies out of the government so efficiently. 

The former President of Russian Railways had been supporting every request for additional funding with his clear vision of the company’s – and the country’s as well – grim future, should his claim be declined. For example, his request for 100 billion was illustrated by a perspective of an inevitable increase in tariffs by almost 18%; while in 2012, when asking the Russian National Wealth Fund to provide 38.5 billion rubles for social traffic, he threatened to fire 3 thousand employees otherwise. 

Demands for subsidies from the Russian National Wealth Fund were a good tradition for Yakunin. Various amounts – from 15 to 200 billion rubles (once even 1.5 trillion rubles!) had been requested from the fund several times in a year. At the same time, since 2012 the company had been consistently selling out its assets – first, incidental ones and then – absolutely relevant and essential assets, including railcars (the total cost of railcars sold in 2010 was almost 38 billion rubles). 

The permanent financial distress of the federal railroad company had never affected in any way the salary of its President. In 2014, the monthly salary of Yakunin was 4 to 5.5 million rubles – this is approximately 9 times higher than the salary of Vladimir Putin, the President of the Russian Federation, in the same period; 150–170 times higher than the monthly wage of an engine driver at Russian Railways; and 300–320 times higher than the salary of a track serviceman. Apparently, Yakunin was somehow concerned about this income difference – an in 2014 Russian Railways declined to disclose incomes of its President and other top managers.    

The father, the son

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As usually, after the appointment of Yakunin the President of the Russian Railways, his proteges came to all key positions in the company. Of course, some people haven’t come officially, but their influence on the railroad empire could be compared with powers of its Vice Presidents.

In 2007 Yakunin said on public that his friend businessman Andrei Krapivin was his “counselor and experienced financial expert having deep knowledge of the banking business”. Some media even started wondering whether Krapivin had an official status in the Russian Railways.

Following a recommendation by Yakunin, Krapivin had been appointed the Head of Freight One, a subsidiary company of the Russian Railways, – but the businessman was never officially related with the state corporation. 

However, his input into grandiose, multilevel plundering of the Russian Railways was paramount. Andrei Krapivin has created a sprawling network of mostly offshore companies with lots of dummy firms disguised for real contractors. 

Krapivin senior was not a public personality – he preferred to participate in tenders held by the Russian Railways through technical companies and owned most of his Russian assets via offshore firms. Thanks to his close links with Yakunin, Krapivin, in fact, got direct access to the Russian Railways funds, and soon he has involved shady businessmen Valery Markelov and Boris Usherovich into his schemes. 

According to Slon.ru, they had created – specifically for tenders held by Russian Railways – dozens or even hundreds of companies; these companies were winning governmental contracts and transferring funds to offshore zones. The money had been laundered, deposited on special accounts, or cashed. Real subcontractors, who were actually performing the works, received only small portions of the contracted amounts.

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The scheme of offshore companies retained as contractors by Russian Railways. Illustration by Slon.ru 

According to sources familiar with the scheme created by Krapivin, Markelov was mostly dealing with business aspects – while Usherovich, familiar with leaders of Solntsevo and Lipetsk organized crime groups, used to settle issues related to illegal activities.

According to Polit.ru, very soon the three entrepreneurs have gained control over all key subsidiary companies of the Russian Railways pumping out billions of rubles through governmental contracts: Transmashkholding railway car building plant, Rusagrotrans grain carrier, Freight One international carrier, Lengiprotrans project bureau; Legion private security company, Infotekh, etc.

Shortly after this Krapivin senior has retired from the business and later died in Switzerland in 2015. His son Aleksey has become the new manager of the offshore network of companies siphoning budget funds off through billion-ruble contracts with the Russian Railways.

Baikal–Amur Mainline Railway is ours!

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In 2014 the corruption scheme had been slightly altered – although the main characters remained the same. Krapivin junior, Markelov, Usherovich, and businessman Yuri Obodovsky, a new team member, have established 1520 Group of Companies Limited Liability Company. Almost immediately after this, its subsidiary company has won a tender to electrify the East Polygon (Baikal–Amur Mainline Railway and Trans-Siberian Railway) for the total of 28 billion rubles.

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Yuri Obodovsky 

It is necessary to note that another major tender for 44 billion rubles has been won by a consortium headed by Bamstroymekhanizatsia company, which had changed its owner (earlier it was Vasily Tarasenko, the company founder) right before the tender. 

Reconstruction of the Baikal–Amur Mainline Railway is one of the largest projects of the Russian Railways; it was initiated by Vladimir Yakunin. In addition to 562 billion rubles provided by the government, it also includes a number of extra works related to East Polygon infrastructure modernization – so the grand total of costs will be at least 1 trillion rubles. Bamstroymekhanizatsia is the general contractor in the Baikal–Amur Mainline Railway reconstruction project. 

This actually means out that the company – winner of the tender for a federal-level project approved by Vladimir Putin in 2013 – belongs to some Sterema Limited registered in Cyprus. Sterema Limited, in turn, belongs to Evling Business Inc. based on the British Virgin Islands. Its ultimate owner is unknown, but Novaya Gazeta (the New Paper) has documents showing that Evling Business Inc. had received money to purchase Bamstroymekhanizatsia from structures controlled by Aleksey Krapivin. 

According to Forbes, the total amount of contracts awarded by the federal railroad corporation to companies controlled by Aleksey Krapivin, Yuri Obodovsky, Valery Markelov, and Boris Usherovich during the 13 years of Vladimir Yakunin’s work in the Russian Railways is some 334 billion rubles. This calculation is approximate, and the amount is not final. No one – including the four businessmen – can probably provide the exact number of companies created by them at different times – the companies that were pumping and still continue pumping budget funds out through Russian Railways. 

Operations of the shady quartette – even at the scale currently known to the public – could not be performed without a very powerful cover in the Investigative Committee of the Russian Federation (ICR), Federal Security Service of the Russian Federation (FSB), and Ministry of Internal Affairs of the Russian Federation (MIA). For many years, the scheme was running in close collaboration with corrupt enforcement officials who were covering the plunderers and clamping down on all attempts by watchdog authorities to bring them to account.

According to a CrimeRussia source, the Colonel Dmitry Zakharchenko, the Head of the Department T of the General Administration for Economic Security and Combatting the Corruption of MIA, was playing an important role in the provision of security for the Krapivin–Markelov–Usherovich group.

Colonel of Russian Railways

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Dmitry Zakharchenko 

Dmitry Zakharchenko was arrested on September 8, 2016 and shocked the country with the amount of cash seized during searches ($123 million and €2 million in his sister’s apartment and 13 million rubles, €5 thousand, and $170 thousand in the car). There were plenty of versions of the cash origin. The Colonel was charged under three articles of the Criminal Code of the Russian Federation: abuse of official powers, bribe-taking, and obstruction of carrying out of justice and of preliminary investigations. 

It became known very soon that Zakharchenko was providing information about upcoming arrests and searches to suspects in several high-profile and – apparently – unrelated cases: Galina Marchukova, the Financial Director of Nota-Bank accused of misappropriation of 26 million rubles belonging to bank clients; Denis Nikandrov, the Deputy Head of the Main Investigations Directorate for the City of Moscow of the Investigative Committee of the Russian Federation; Fatima Misikova, girlfriend of crowned thief Shakro Molodoy and a person directly related to the shooting on Rochdelskaya street, and Mikhail Slobodin, the Head of VimpelCom telecommunications company. The last two persons – thanks to the prompt notification – managed to escape abroad.

Everything seemed clear in this case. However, on September 27, 2016, during a session of the Moscow City Court, the investigation was unable to prove the fact of bribe-taking by Zakharchenko from an unidentified person, while the testimony of Marchukova was missing in the case file of the Head of the Department T of the General Administration for Economic Security and Combatting the Corruption of MIA. The Colonel denies all accusations as well as any relation to the money found with him.

Two days after the arrest of Zakharchenko, the CrimeRussia source told that the colonel had been under surveillance of the FSB Department M for a pretty long time. Zakharchenko could be detained as early as in the end of 2015, but the FSB officers had been checking his possible involvement into a number of other crimes – that has ultimately been confirmed.

Operatives knew that Zakharchenko was directly involved into mass larcenies in Russian Railways through contracts awarded to companies of Markelov–Usherovich and had been shielding them from potential troubles with the law.

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Later it became known that one of the first witnesses to testify against the Colonel Zakharchenko was Petr Chuvilin, a banker convicted for swindling, and, according to Rosbalt.ru, directly related to the machinations in the Russian Railways.

Chuvilin testified that the colonel was on his payroll for 9 years for covering dozens of criminal schemes, mostly involving funds of Russian Railways. In particular, he mentioned the amount of €150 thousand per month.

A former colleague of Zakharchenko in the 5th Operational-Investigative Bureau overseeing major construction projects has confirmed to Novaya Gazeta that Zakharchenko started working with monopolistic construction contractors of the Russian Railways in that period. 

According to Rosbalt.ru, Zakharchenko and the Colonel Zabednov, another influential fixer in the MIA who had taught all these gray schemes to Zakharchenko, were shielding hundreds of companies and banks siphoning funds off the Russian Railways; the source estimated damages at “dozens and hundreds of billions of rubles”. 

After the sudden death of Zabednov in 2012, Dmitry Zakharchenko started getting a considerable share of these financial flows, – his former colleague said. According to Novaya Gazeta, Zakharchenko used to collaborate most closely with Markelov, who appreciated the effectiveness of the colonel and rewarded his eagerness generously. It is also known that the colonel was personally familiar with Andrei Krapivin. 

Interestingly, as soon as the media started discussing possible links between detained Zakharchenko and monopolistic construction contractors of the Russian Railways, Vladimir Yakunin, the former President of the company, has suddenly fled the country. According to his representatives, Vladimir Yakunin, being the Vice Chairman of the Endowment for the World Public Forum – Dialogue of Civilizations, is going to deliver lectures abroad. When journalists attempted to contact him, Yakunin – normally talkative – has evaded the answer. 

“I am abroad with friends, I have a habit to take all calls, but I can not communicate now,” – he said.

A new broom

Most facts related to the monopolization of the Russian Railways contracts, nepotism, and larcenies are attributed to the epoch of Vladimir Yakunin. Following his ten-year rule, the national railroad infrastructure is to remain in deep debts for a pretty long time. The federal company also has to build railways in some regions – it turned out that six subjects of the Russian Federation (Republics of Altai and Tyva, Nenets Autonomous District, Magadan region, Chukotka Autonomous District, and Kamchatka krai), have no railway transportation service, while in 10 other regions it is developed insufficiently. 

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Oleg Belozerov 

The rule of Oleg Belozerov, the new President of the Russian Railways and former Deputy Minister of Transport, has begun pretty optimistically: after a 100-billion net loss sustained by the Russian Railways in the year of 2015, the state corporation now has a net profit of 8.2 billion rubles, while the staff of million people has been cut by almost 200 thousand. Therefore, the statement by Belozerov that the Russian Railways will not need governmental assistance in the next two years, seems realistic. Perhaps, the situation can miraculously change, indeed? Corruption would be eliminated, the company would bring high and stable profits, while the Russian trains would be as comfortable as the European ones?

Power of traditions

Actually, upon closer view, there are not many reasons to be optimistic. Yes, the Russian Railways is not asking for money – but the funding has already been provided. In February 2015 Dmitry Medvedev increased the charter capital of the Russian Railways by 47.38 billion rubles to implement investment projects. Some profit has been gained, but according to a recent forecast by the Russian Railways, the year of 2017 might bring a loss of 142 billion rubles. Still, in anticipation of the future achievements, the state corporation has already raised salaries of its top managers. Oleg Belozerov has earned 86 million rubles in 2015, while the total income of the company management will increase by 14.5% in the current year and reach 1.6 billion rubles per month.

The situation with corruption is also far from ideal.

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Andrey and Vladimir Yakunin 

Although most Yakunin’s top managers have been removed from their positions shortly after the resignation of their leader, according to Radio Svoboda, many heads of branches in the Russian Railways have retained their posts and continue acting in close collaboration with prosecution and transport police – who provide cover for mass larcenies. For old time's sake, the interests of Yakunin, most probably, will not be infringed in his former corporation. For example, a company belonging to Andrei Yakunin, the eldest son of Vladimir Yakunin, sales electronic tickets for the Russian Railways; since June 2016, the ICR is being checking whether the structures of Andrey Yakunin are affiliated with the former workplace of his father. 

Overall, the situation with monopolistic contractors of the Russian Railways remains the same. Apparently, the main personalities would have to leave – after numerous publications in media, it is unlikely that the team of Krapivin could retain its positions and continue cutting best pieces of the Russian Railways pie as before. But nature abhors a vacuum, and it is not a secret that Oleg Belozerov, the new President of the company, is an old friend of Arkady and Boris Rotenberg.

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Arcady and Boris Rotenberg 

Their friendship started back in the middle of the 2000s, when the current President of the Russian Railways was the Head of the Federal Road Agency (Rosavtodor), while the Rotenberg brothers – by some coincidence – were actively involved into construction of federal motorways: M-4 Don, M-11 Narva, Moscow–St. Petersburg, and M-9 Baltia. The brothers would definitely appreciate an opportunity to participate in the reconstruction of the Baikal–Amur Mainline Railway. Today their chance to get access to multibillion governmental contracts is higher than ever before.

Documents

 Results of Russian Railways tender

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