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By John Helmer in Moscow

In the long history of collapsing empires, there is a golden rule. If and when the outflow of wealth to the foreign concessions or colonies exceeds the wealth that flows back to Empire HQ, the empire is on its last legs.

There is one modification of this rule; it’s for empires which export armies and war-making machines. These empires can go on losing wars abroad almost indefinitely, so long as the generals and the captains can finance their campaigns from their conquests, and don’t think of returning to replace those in charge at home. These are the warlord empires. They export the wherewithal for the establishment of new warlords in novel places almost constantly. Losing wars can be just as profitable for them as winning them, so long as they keep alive and keep moving; and their targets stay in fear and trembling.

For a few early years of the 1990s, Boris Yeltsin was thought of in Washington as a candidate for warlordship in what his controllers hoped would be a Russian territory much diminished by his incompetence, and by the superiority of rival warlords next door. For a time, Yeltsin was so craven, he was satisfied with a ring of just three small armies – the presidential bodyguard around his person; a regiment inside the Kremlin Wall; and a division on Khodynskoye Pole, inside the Moscow Ring Road.

Once that much was secured, Yeltsin thought of expanding his empire by licensing his regional governors to be warlords on their territories; and a handful of businessmen to become concessionaires of the resource riches of the state. These were, and they remain, the so-called oligarchs.

Just as governors could loot their regions, on condition that at election time they sent in enough rigged ballots for Yeltsin, the oligarchs could loot their resource concessions, so long as they paid their fealty fees, and didn’t spend the money on political opponents. That’s why the two oligarchs who were suspected of breaking that rule – Vladimir Gusinsky and Boris Berezovsky – live abroad today. The third oligarch who broke that rule, also broke the one about not sharing his asset sales with his masters. He’s the one in jail today.

The big difference between (let’s take for example) Oleg Deripaska, Suleiman Kerimov, Mikhail Prokhorov, Gennady Timchenko, and Victor Vekselberg together, and Mikhail Khodorkovsky, is not that they lack safe haven for their wealth in the US , the UK, Switzerland, France, and elsewhere abroad. The warlord and concession system makes pursuit of safe havens prudent, inevitable, insatiable.

The difference is that Khodorkovsky tried to sell his Russian oil assets to an American oil company directly, after being told at the Kremlin that he shouldn’t. Khodorkovsky made the mistake of thinking that he owned Yukos, and could do what owners think they can do. He forgot what warlords and concessionaires forget at their peril: power and wealth are the gift that keeps on giving – if you don’t want to keep on giving, run for your life.

Most of the oligarchs named have been allowed to accumulate hundreds or thousands of millions of dollars’ worth of assets in safe havens abroad, which have been paid for from the tax-optimized earnings of their Russian concessions. Since September 2008, they have even lost billions of dollars’ worth of foreign asset value, and with the exception of the biggest of the Russian losers, Deripaska – they have managed to stave off default and forfeit of these assets by continued profit-making inside Russia.

But even Deripaska’s forfeits have been small by comparison with the $20 billion debt that remains — for which he’s so far managed to find state guarantors. Of course, he’s had to pay for that.

The golden rule recommends that there ought to come a time in this Russian empire when too much Russian wealth is being exported to cover loss-making in the US, Europe, and elsewhere, and when those responsible for the haemorrhage should pay the penalty for it with their own blood. That hasn’t happened yet.

Instead, the Russian debt collection process for the country’s biggest defaulters has been producing an even greater concentration of assets in the hands of the oligarchs than they had, before the crash of 2008. But if a true oligarch balance-sheet were to be audited, it is likely to show what each oligarch believes about his fellows – each of them has paid for the state bailout of their debts by giving up blocs of their shares, with the option, possibly, of buying it back.

Think of this as a process in which a grand concessionaire like Ronald McDonald awards the right to sell cheese burgers as long as the concessionaires he picks can meet their payment obligations. When they can’t, Ronald doesn’t shutter the shops, or replace their operators. Instead, Ronald takes a third to a half of the concession back into a personal trust; jacks up the cash payments; levies draconian interest payments and mortgage obligations; and congratulates his concessionaires on how lucky they are he isn’t throwing them into prison for fraud and tax evasion. In this Ronald McDonald world, the scheme converts income and dividend taxes into something else, because the effective interest rates charged on capital are hidden; and because the buy-back option camouflages who is really in control.

In places where usury is a form of organized crime, this type of Ronald McDonald concession is recognizable as a Shylock scheme.

Early this month, Admiral Dennis Blair, the US Director of National Intelligence, told the US Senate that when it comes to threats to the US from Russia, there is something systematically criminal about the way Russian business is linked to the state in what he called the “Growing Threat from International Organized Crime”. Blair doesn’t say much to explain what exactly this is, but it is clear he has more on his mind than simple Shylocking.

There is “a growing nexus in Russian and Eurasian states”, Blair testified, “among government, organized crime, intelligence services, and big business figures. An increasing risk from Russian organized crime is that criminals and criminally linked oligarchs will enhance the ability of state or state-allied actors to undermine competition in gas, oil, aluminum, and precious metals markets.”

Because Russia’s oligarchs are so well-known, and their assets, along with the country’s natural resources, are so highly concentrated, it looks like Blair means to say that the concentration itself is potentially criminal in character; and that lately the concentration and criminalization risks have been growing. In short, Blair appears to be calling the Russian oligarchs a criminal threat that has gotten worse since the crisis of 2008.

Because Blair was specific about the Russian resources he had in mind, his risk list may refer to several obvious individuals who control the following Russian resources:

Oil & gas Aluminium Platinum Gold

From left to right: Igor Sechin, Gennady Timchenko, Oleg Deripaska, Vladimir Potanin, Suleiman Kerimov, Mikhail Prokhorov.

Why did DNI Blair select this list of resources, and why is he picking on these fellows?

“IOC penetration of governments,” he said, “is exacerbating corruption and undermining rule of law, democratic institution-building, and transparent business practices.”

The only monopolist on the list, and incidentally the only oligarch who is denied a US entry visa, is Deripaska. But as Deripaska explained when he authorized page 36 of the prospectus United Company Rusal lodged with the Hong Kong Stock Exchange on December 31, he isn’t under investigation in the US, and is free to come and go there as he pleases. Here’s an excerpt of Rusal speaking for Deripaska:

“There has been negative coverage in the media recently relating to the rejection by U.S. authorities of Mr. Deripaska’s application for a visa to enter the United States. Some of such coverage includes speculation that the rejection was due to alleged connections to organised crime. There were also media reports alleging that Mr. Deripaska had travelled to the United States twice in the past few months using entry permits arranged by the Federal Bureau of Investigation, with whom he is alleged to have met during his visits. Mr. Deripaska has confirmed to the Company that he had an application for a U.S. visa denied in 1998 pursuant to Section 212(a)(3) of the U.S. Immigration and Nationality Act, which relates to aliens deemed ineligible for U.S. visas based on security, unlawful activity and related reasons, and that this position was reiterated in 1999 and 2000. Mr. Deripaska has repeatedly and consistently challenged these denials as being unwarranted and unsupported. He has also confirmed to the Company that he subsequently visited the United States lawfully a number of times. The most recent visits were in August and October 2009. On these occasions, Mr. Deripaska was permitted to enter the United States pursuant to Section 212(d)(5) of the U.S. Immigration and Nationality Act, whereby neither his movements nor his activities was restricted. Mr. Deripaska has also confirmed to the Company that, to the best of his knowledge, he is not under investigation by any U.S. authority.”

Deripaska, far left, on a visit to Detroit in 2009, with (next left) General Motors’s chief executive, Fritz Henderson; German Gref, chief of the state-owned Sberbank; and Siegfried Wolf of Magna, the Canadian auto supplier, which was the partner in the Sberbank-financed bid for Deripaska to buy Opel from GM. The FBI and the US Department for Homeland Security reportedly issued a waiver of the State Department visa ban to allow Deripaska to visit Detroit. The US Government’s Auto Task Force and the General Motors board later decided to reject the Deripaska bid to buy Opel.

The section of the US statute, which was applied to let Deripaska into the country last year, makes perfectly clear that Deripaska was under tight restriction of duration, movement, geography, and purpose when he was in the US. The section also makes clear that he is still under both visa restriction and case investigation. According to Sect 212(d)(5): “The Attorney General may, except as provided in subparagraph (B) or in section 214(f), in his discretion parole into the United States temporarily under such conditions as he may prescribe only on a case-by-case basis for urgent humanitarian reasons or significant public benefit any alien applying for admission to the United States, but such parole of such alien shall not be regarded as an admission of the alien and when the purposes of such parole shall, in the opinion of the Attorney General, have been served the alien shall forthwith return or be returned to the custody from which he was paroled and thereafter his case shall continue to be dealt with in the same manner as that of any other applicant for admission to the United States.”

Admiral Blair casts fresh doubt by the US intelligence services on the “significant public benefit” that warranted Deripaska’s Sect 212 waiver. Blair was in the Navy when Deripaska’s initial visa rejections were decided. But last year, when Deripaska crossed the US frontier, Blair told the Senate he was busy investigating International Organized Crime (IOC), and all its branches, tentacles, and bosses. Blair wasn’t the only one. The US Department of State reported at the time that its Criminal Investigations Division “manages the Russian Business Investigations Initiative to combat Russian and Eurasian organized crime groups seeking entry into the United States.”

Also, since May of 2009, according to an announcement by the US Attorney-General, Eric Holder, “a new International Organized Crime Intelligence and Operations Center (IOC-2)” was established in Washington to “marshal the resources and information of nine U.S. law enforcement agencies, as well as federal prosecutors, to collectively combat the threats posed by international criminal organizations to domestic safety and security.” The list of US agencies represented in this new outfit included: “the FBI; U.S. Immigration and Customs Enforcement (ICE); the Drug Enforcement Administration (DEA); U.S. Internal Revenue Service (IRS); the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF); U.S. Secret Service; U.S. Postal Inspection Service (USPIS); U.S. Department of State’s Bureaus of Consular Affairs and Diplomatic Security; U.S. Department of Labor, Office of the Inspector General; and the U.S. Department of Justice, Criminal Division. IOC-2 will also partner with the 94 U.S. Attorneys’ Offices and the U.S. Department of the Treasury, Office of Terrorism and Financial Intelligence.”

Blair and the intelligence agencies seem to have missed their seat at this table, but they are coordinating nonetheless with the FBI and the State Department. In launching this month’s attack on Russian oligarchs like Deripaska, the Director of National Intelligence was joined by both agencies when he put the Russian oligarchs in the premier risk league, alongside cyber-attackers, Al-Qaida, the Afghan Taliban, Iran, North Korea, swine flu, and global warming.

In Russia, as in China, according to Blair, the threat is double-edged. Inside those countries, he said, “IOC corruption of party and government officials is aggravating an already difficult operating environment for US businesses.”

And abroad, including the US, Blair said, “IOC almost certainly will increase its penetration of legitimate financial and commercial markets, threatening US economic interests and raising the risk of significant damage to the global financial system. International criminal organizations are amassing substantial financial clout. International criminal organizations will increasingly damage the ability of legitimate businesses to compete and may drive some legitimate players out of the market. IOC engages in bribery, fraud, violence, and corrupt alliances with state actors to gain the upper hand against legitimate businesses.”

Since the visa ban on Deripaska was waived last year, in order for him to meet with General Motors in Detroit, and Morgan Stanley and Goldman Sachs in New York, Blair appears to be hinting that there’s something IOC-risky about US banks financing oligarchs like Deripaska. In fact, Morgan Stanley and Goldman Sachs were advisor managers of Deripaska’s first attempt at listing Rusal on the London Stock Exchange in 2007. Goldman Sachs reportedly withdrew from this role when Rusal was preparing its recent Hong Kong Stock Exchange listing. But Bank of America Merrill Lynch was one of the book-runners, reportedly deriving its compensation in Rusal shares whose price it has been boosting. Does that make Mother Merrill an IOC risk, according to Blair?

And where has the DNI been when, in the blaze of publicity that began last September, the US National Basketball Association has been conducting due diligence on Prokhorov’s proposal to buy the New Jersey Nets team franchise, and a controlling stake in the associated Brooklyn arena project?

Prokhorov’s company, Onexim Sports and Entertainment Holdings, is reported to be paying at least $200 million, possibly more – much of it to be borrowed from US banks — for an 80% stake in the Nets, and a 45% stake in the new Brooklyn arena, known after the UK bank as Barclays Center. Contract signing on the acquisition took place on December 15. Six weeks later, in late January, New York reports claimed that NBA approval of Prokhorov was “days away”.

There have been several civil court proceedings opposed to Prokhorov’s plans, but no sign of US government opposition, let alone an edict from either Blair’s office, or from the Justice Department’s IOC-2. Since Blair is so certain that control of Russian goldmining – shared principally between Kerimov and Prokhorov, who own the Polyus Gold open joint stock company – who else can Blair have meant when he pointed his finger?

Even Prime Minister Vladimir Putin – if Blair is right, either a prime target for IOC attacks or a prime mover – has publicly acknowledged this week that the oligarchs have been diverting their cash and violating their concession terms. Putin named three oligarchs – Prokhorov, Potanin, and Victor Vekselberg – whom he accused of draining cash out of the electricity-generating companies they control. About Prokhorov, Putin launched a hint that he hasn’t been as pleased about Prokhorov’s US basketball investment as Prokhorov has been claiming to the NBA. Prokhorov, said Putin on February 24, “is feeling pretty well-off economically. He cashed out his assets. … He has the money and … is looking for ways to invest these funds.” The Ronald McDonald hint was plainly stated – the energy concessionaires, said Putin, “blame the crisis and the lack of demand … but when they are offered to build a power station in a place where there is guaranteed demand … in Sochi, for instance, they back out.” Putin’s proposal – a whopping fine for the concessionaires.

Although Putin was visiting the accident-prone Sayano-Sushenskaya hydroelectric plant in Siberia, when he made this week’s attack on the three oligarchs, he omitted Deripaska’s name, although Rusal is the principal beneficiary of that power plant, which suffered a catastrophic breakdown of turbines last year. Was Putin protecting Rusal’s share price, and its state shareholders, from the downward pressure that a threat to cheap electricity would have for the Rusal smelters that depend on Sayano-Sushenskaya?

Blair’s testimony to the US Senate doesn’t mention Putin by name. Instead, he identifies President Dmitry Medvedev and his modernization campaign as the panacea the US is looking for against the Russian oligarch risk. According to Blair, “in addressing nationwide problems, Medvedev talks about Russia’s need to modernize the economy, fight corruption, and move toward a more rule-of-law-based and pluralistic political system, but he faces formidable opposition within the entrenched elite who benefit from the status quo. Turbulence in global energy markets was a painful reminder to Moscow of the Russian economy’s overdependence on energy, dramatizing the need for constructive steps toward economic modernization and diversification. However, moving forward on issues such as reforming Russia’s state corporations or creating conditions more conducive to foreign investors could produce a backlash by those forces who might lose from competition.”

This looks like a US Government strategy to support Medvedev’s campaign for re-election in 2012. If that also means that Blair is taking a shot against Putin and the Ronald McDonald system, we will soon find out how much further the American government will go.

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