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#19 - JRL 7227
Novaya Gazeta
June 16, 2003
Two defense sector executives murdered: what are the implications?
Author: Pavel Felgengauer, Novaya Gazeta reviewer
[from WPS Monitoring Agency, www.wps.ru/e_index.html]


Igor Klimov, 42, acting director general of the Almaz-Antei concern, the largest holding company in the defense sector, was shot dead near his home in Moscow a week ago. In fact, Almaz-Antei is a monopolist in the sphere of production and exports of state-of-the-art air defense missile systems. Sergei Shchitko, 52, commercial director of Ratep, a structure affiliated with the Almaz-Antei holding, was murdered in Serpukhov in his own Toyota car a few hours later. Ratep has been producing electronics for guidance systems of air defense systems; the state owns an 50% stake plus one share, Nimegan Trading company of Cyprus owns an 9% stake. In the opinion of sources in the law enforcement agencies, these murders "are most likely links in the same chain."

Despite the crime rate within the system of the defense industry, which is directly connected with arms exports and in which billions of US dollars are circulating, the matter has never before gone as far as assassination of senior executives, especially Kremlin's proteges from the active reserve of the special services. Klimov is the first one.

The trade in arms and nuclear technologies appears to be almost Russia's only article of hi-tech exports, and beginning with 1997 the sales in this sphere have increased over 100%. The exports in the field of military-technical cooperation alone profited over $4 billion, and $5 billion if nuclear exports are included, to Russia in 2002. However, where is this money "Russia has earned" are transferred?

Al of a sudden, Auditing Commission chairman Sergei Stepashin announced in December 2001 that, according to his organization, only about $7,000 (226,000 rubles) had been directly transferred to the federal budget in 2000, with the total value of the arms exports being $3.7 billion. As is turns out, all statements to the effect that "Russia has been making billions of dollars from the arms trade" don't correspond with reality. Not Russia as such, but certain people in Russia are making this money. However, if almost nothing reaches the budget, the biggest part of the arms profits is more likely transferred back to foreign states to accounts at offshore zones - Cyprus, the Channel Islands, the Cayman Islands, etc.

In its due time, Stepashin's announcement caused a tempest of indignation among those who are involved in sharing the pie of the military-technical cooperation. However, for some evident reasons, that tempest was concealed from the public. In that case, as is widely known, Stepashin was reflecting dissatisfaction of the Kremlin and Vladimir Putin for impudent and comprehensive embezzlement of earnings profited from the arms exports.

According to the calculations of the finance ministry, approximately $70 million benefited from the military-technical cooperation gets into budgets of all levels, but the finance ministry doesn't know the exact amount. At any rate, the state's revenue from the exports valued at $4 billion is so desperately negligent.

It should be noted that all arms and licences sold are Soviet developments or produced using Soviet-era equipment. The entire field of "hi-tech exports" which is under discussion more resembles a primitive sale of the privatized Soviet property.

For instance, huge brokerage is paid, to foreign intermediaries as well (sometimes over 20% of the amount of a transaction), to artificially exaggerate the production cost and conceal the profits; as it turns out afterwards, an "intermediary" is a dummy and the funding is immediately transferred to definite offshore accounts. Otherwise, a foreign intermediary actually exists, but, by a preliminary agreement, immediately transfers 50% of the brokerage to the offshore accounts of a Russia-based contractor.

Exaggerated brokerage for freight services is paid in arms transactions; spare parts are ordered at overstated prices; fictitious "investment" is specified and, again, a share of all profits is transferred to offshore zones. Competent people assume that at least 50% of the receipts from the military-technical cooperation go on the side as illegal net profit, which makes almost $2 billion with the exports worth of $4 billion annually.

After this money is laundered somewhere in Cyprus, it is then divided; a big part of it gets into the state apparatus to the "supervising bodies," and therefore any efforts to at least reform the defense industries and the military-technical cooperation somehow have failed so far.

The Kremlin has competing (primarily for free money) factions. Following Stepashin's fruitless attack, the strengthening grouping of "secret service agents" seems to have decided to put its hands on the most tasty morsels of the military-industrial complex using a tested method: consolidate the freedom of small-scale operators inside holdings and placed their people, such as Klimov, into management. This version is likely to be sure if backed by the unified power of the special services, but severe resistance was offered - even bullets started whistling around. "The current situation needs to be changed as fast as possible; I'm afraid, however, that we have little time for that," Klimov said shortly before his death.

Indeed, it is impossible to squander the Soviet heritage forever: the allegedly endless resources of spare parts are about to run out; old Soviet-era projects are becoming more obsolete as compared to the level of the advanced Western states.

Property relations are weakly regulated in the military- industrial complex; almost no one pays taxes, duties or VAT. Thus far, the state is in control of the majority holdings of enterprises and, in many cases, the sole proprietor. However, the nominal owner (the state) gets no profits tax.

Ordinary employees are in need, the enterprises are going broke; while secret owners - administrators, intermediaries, banks - are handling hundreds of millions of dollars (or even billions, in total), without supervision.

Realizing that they could be thrown out after the Kremlin's next redistribution of control over the money flows, any moment now, and the enterprises they are managing could be affiliated with a "holding" formed by a decree, these factual owners are mainly behaving as arrogant favorites: carrying what they can into offshore zones; then, at best a "foreign" Cypriot company purchases a share holding, but nothing or almost nothing is invested in the development of new technologies.

Undoubtedly, the real criminal underworld couldn't have failed to begin implanting in this environment in compliance with the scheme verified in the aluminum sector and other branches of industry.

Klimov was right that air defense systems have rather good export prospects. The amount of air defense systems sold to China, Greece, Iran, the US in the 1990s is worth $2 billion. At the same time, China is continuing to purchase additional systems (modernized S-300 PMU2 Favorit), Iran and Syria are willing to buy S-300 systems as well, being beware of U.S. air strikes, while India encircled by the "nuclear" Pakistan and China has no state-of-the-art air defense system at all. Almaz, Antei, Fakel Design Bureau (researcher of missiles for the entire set of air defense systems) have piles of Soviet-era developments to be exported, precisely because relatively few systems were sold in the 1990s.

However, the "secret service agents" seem to have failed to take into consideration that distribution of the exports revenues had been especially fierce in the sphere of exportation of air defense systems in the 1990s. For instance, four S-300 PMU1 air defense systems were supplied to China in 1995. Closed joint-stock company Volkhov. Defensive Systems settled all accounts with the manufacturers, and even though China paid the full sum, many suppliers of component parts, including the Moscow Radio Engineering Plant (MRTZ) and the Mechanical Plant of Nizhny Novgorod didn't get any money. Volkhov. Defensive Systems went bankrupt, retained all debts, while all the assets and the previous managers changed for Defensive Systems registered in Gorno-Altaisk, which later founded Defensive Systems financial industrial group under the patronage of Klebanov. This enterprise had, and still seems to have claims to become the head enterprise for exports of air defense systems.

In general, there are two dirtiest but most profitable kinds of business in this world: drugs trafficking and the arms trade.

The constantly increasing flows of illegal and semi-legal money couldn't have failed to attract into defense industries the dark and evidently criminal figures, ready to fight the omnipotent "secret service agents" under the Kremlin.

The patriots supporting the state have clashed with the patriots in law in the struggle for money. Igor Klimov's murder may be the sign that the dark world of crime has finally swallowed yet another part of the Soviet-era legacy.

(Translated by Andrei Ryabochkin)

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