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Central Asia, the Panama Papers and the myth of the periphery

Far from operating in isolation, Central Asia’s elites have been quietly accumulating power with the help of western tax havens. 

Bradley Jardine Paolo Sorbello
20 May 2016
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Panama City. CC BY

dronepicr / Flickr. Some rights reserved.In the past month, the Panama Papers have dragged a number of Eurasia’s oligarchic networks out of the shadows and into the arena of public scrutiny. The leaked documents reveal that Central Asian elites and businesses are embedded in a highly globalised system of shell companies and offshore intermediaries. 

This argument is not new. As Alexander Cooley and John Heathershaw explained in a recent academic paper, these revelations contradict long-held western assumptions about Central Asia as a peripheral region disconnected from the global economy. Rather than operating in isolation, the region’s elites have been quietly deploying the same lexicon and sophisticated practices as financial actors looking to dodge taxes.

Western “supply-side” corruption 

Regarding the potential for a mobilisation of public outrage, the anonymous source behind the Panama leak stated that “a new global debate has started” in a manifesto for Süddeutsche Zeitung.

In tune with the usual refrain that bribing is rife outside the west, David Cameron referred to Afghanistan and Nigeria as “fantastically corrupt” during an embarrassing microphone slip-up on 10 May ahead of the London Anti-Corruption Summit. In response, corruption experts at Transparency International were quick to brand Cameron’s government as “extraordinarily inept” for its lax regulation and transparency requirements across British-controlled offshore dependencies such as the Cayman and Virgin Islands (BVI). 

These developments suggest two market logics in play. Whereas oligarchs from outside the west operate from a logic of “demand-side” corruption seeking discreet locations to launder money, the west operates from a logic of “supply-side” corruption.

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Model of Astana, Kazakhstan. CC Chris Price / Flickr. Some rights reserved.This logic derives from the west’s provision of financial tools and shell companies registered in territories such as Panama, Guernsey, Gibraltar, or even in the heart of Europe in Luxembourg. Such havens were primarily designed to grant western firms the capacity to outmaneuver tax agencies, but they’ve had the ripple effect of perpetuating capital flight across the developing world.

As oligarchs strip their nations of wealth, the effects send shockwaves through cosmopolitan centers such as London, primarily through housing inflation. 

These developments suggest that western tax havens have played a crucial role in consolidating political power in the hands of Central Asian elites

It’s no wonder anti-gentrification protests are occurring at alarming rates in London. Almost one in ten properties in the City of Westminster are owned by companies registered offshore. This practice has led to a staggering 2.25 square miles of London being filled with empty, unused properties. These “ghost-streets” present an important moral concern at a time when tens of thousands of low income families have had to leave the inner-city.

Central Asian oligarchs are among the forerunners of this process. Rakhat Aliyev, former husband of Dariga Nazarbayeva, daughter of Kazakhstan’s president, owned a £137m commercial and residential block in London, spanning from 215 to 237 Baker Street, through BVI-registered companies according to a report by Global Witness last year. The problem has become so prevalent that anti-corruption campaigners have even organised a “kleptocracy tour” of London. 

Uzbekistan: pop stars and telecoms

The most recent Panama leaks have implicated the inner circle of Uzbekistan’s Gulnara Karimova, daughter of president Islam Karimov. Karimova, a businesswoman and socialite sometimes referred to as Central Asia’s Paris Hilton, was long expected to succeed her father as president until a power struggle in 2013 saw her placed under house arrest. Uzbek prosecutors at the time accused Karimova of stealing $53m from the state through blackmail and extortion. 

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Gulnara Karimova in a Facebook picture, 2014. Source: Facebook. Since then, Karimova’s business holdings dissipated. Dozens of her former employees were imprisoned, including her then-boyfriend, Rustam Madumarov, a former Uzbek pop star. Madumarov was mentioned in the latest Panama leak for having owned a string of British-based intermediaries.

Although Karimova is not mentioned in the list of more than 100 Uzbek nationals, Daniil Kislov, an analyst at Central Asian opposition website Fergana News, told Al Jazeera he is confident that it was Karimova’s money that was being laundered.

The myth of Central Asia as peripheral to western economic practices has become a hindrance to serious discussion on the region’s failed democratisation 

These developments suggest that western tax havens have played a crucial role in consolidating political power in the hands of Central Asian elites. Eric McGlinchey, who specialises in offshore litigation at George Mason University, told us by email that: “Foreign investors typically pay two different sale prices for enterprises the Uzbek state puts up for privatization. There is the officially recorded sale price concerning the amount foreign investors pay for a controlling percentage of shares in the enterprise. In addition, there is an offshore facilitation payment, in which an investor pays a third-party intermediary with close ties to the Karimov government” in order to secure contracts.

This scheme “allows political elites to capture immense rents”. As Uzbekistan moves toward leadership transition, “we can expect a slowdown in offshoring as the next president reconstructs the lines of patronage,” McGlinchey concluded. 

Gulnara Karimova’s telecoms empire epitomises this logic. Karimova’s telecom dealings first came to light in 2012 when the Swedish broadcaster SVT ran reports on the Swedish-Finnish operator TeliaSonera and the Russian-Norwegian operator VimpelCom, which allegedly paid millions to Karimova to secure mobile licenses. 

According to the prosecutors, TeliaSonera paid $381m and promised an additional $75m, whilst VimpelCom and its Russian mother company Alfa Telecom paid $176m. It’s worth noting that telecom users in Uzbekistan pay among the highest rates in the world for mobile phone service. 

Norway’s opaque business in Central Asia 

VimpelCom’s dealings in Uzbekistan have had negative repercussions for the image of Telenor, the Norwegian state-owned telecoms company that owns a 33% stake in VimpelCom. 

Indra Overland, a research professor at the Norwegian Institute of International Affairs told us over email that “the [Norwegian] government has been proactive, using its role as a major shareholder of Telenor to demand accountability over the firm’s management. In addition, the parliament has been putting pressure on [the company].”

But Telenor is not the only Norwegian company under scrutiny. Aluminium smelter Norsk Hydro engaged in business dealings with TadAZ, the Tajik smelter. A lengthy arbitration emerged from the toxic relationship between Norsk Hydro, TadAZ and Rusal, their Russian competitor. The results of the arbitration are not public, but Norsk Hydro said the settlement “was a combination of repayment, alumina deliveries and metal purchases over several years”. TadAZ, which is also Tajikistan’s largest industrial asset, changed its name in 2007 into TALCO, after the arbitration — this is a common PR practice for companies that want to clean up their record. In April 2016, Swedish-Finnish operator TeliaSonera did the same, changing logo, colours and name into Telia Company.

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Talco Aluminium Factory in Tursunzade, Tajikistan. (с) Amir Isayev / VisualRIAN. All rights reserved.TALCO now operates through Talco Management Limited, a company registered in the BVI. Norsk Hydro says it has not traded with TALCO in three years, but Norway’s main business newspaper Dagens næringsliv questioned the deal that the Norwegian company, which is 34.4% government-owned, struck with TALCO through offshore intermediary companies until 2012. This has resulted in criticism in the Norwegian parliament, where politicians said they want Norsk Hydro to be held accountable. 

Should Norsk Hydro bow to political pressure and unveil its contract with its Tajik partner, the public eye might finally get a glance into the inner workings of the connections between Central Asia and the west via offshore black boxes. And this may be the tip of the iceberg for Norway. In addition to the telecoms and the aluminium sectors, Overland says that “the Panama Papers scandal has also implicated two of Norway’s largest and most respected banks.” 

Kazakhstan’s presidential family

In addition to Uzbekistan and Tajikistan, the Panama Papers also opened the lid on Kazakhstan, giving further credence to the argument that offshore havens represent systemic corruption. Take Kazakhstan’s vice PM Dariga Nazarbayeva, eldest daughter of president Nursultan Nazarbayev. Nazarbayeva appeared on the list as shareholder in Asterry Holdings Ltd, a BVI company active between 2007 and 2011.

Notably, this “shelf company”, i.e. an entity that is left without activity for months, was created just three months after Nazarbayeva’s nomination as chairperson of the medium-sized Nurbank, a bank that her husband had taken control of in the previous months, before falling from grace and being forced to leave the country. Then, in January 2012, just weeks after discontinuing Asterry, Nazarbayeva left Nurbank and was elected to Kazakhstan’s parliament — as if cleansing herself from the ownership of an opaque business offshore before entering into politics.

“Although the use of offshore vehicles is known by insiders, it is rarely discussed in public as a key challenge in the battle against corruption and kleptocracy”

It is obvious that Nazarbayeva’s family is no stranger to offshoring. Even before Nazarbayeva’s ex-husband Rakhat Aliyev died in a prison cell in Austria in early 2015, their son Nurali seemed to play the role of a bridge between the separate business ventures of his estranged parents. Nurali Aliyev’s name appears in two chapters of the Panama Papers: as the beneficiary of Alba International, a BVI-registered shelf company used to hold a bank account, and as a shareholder of Baltimore Alliance, a company that bought and registered a 23-metre yacht in 2008. The yacht, unfortunately for Aliyev, was damaged during a storm and the legal muddle that followed led him to sell off his shares in Baltimore Alliance in 2009.

In recent years, Nurali Aliyev has worked as deputy chairman of the state-owned Development Bank of Kazakhstan, president of the national telecoms company, and vice-mayor of Astana, the capital city. Aliyev resigned from his post in March 2016, saying he would prefer to pursue a career in business. 

The Panama fallout in Central Asia (and in the west) 

Alexander Cooley, a specialist on illicit networks and transnational authoritarianism at Columbia University, said the local response to the Panama Papers in Central Asia will be weak. 

“Although the use of offshore vehicles is known by insiders, it is rarely discussed in public as a key challenge in the battle against corruption and kleptocracy. Part of the problem lies in the lack of public data about offshore transactions — for example, only Kazakhstan regularly reports official FDI stats,” Cooley told us. 

What the Panama revelations have made clear is that autocratisation doesn’t occur in isolation 

Indeed, the BVI were a favorite offshore destination for Kazakhstan's capitals during the 1990s, as can be seen by the statistics. Back then, the small Caribbean archipelago was among the top five countries for FDI flows into Kazakhstan

Similarly to Central Asia, western criticism has been limited as well. This may be due to the calibrated nature of the leaks themselves. It’s important to highlight the fact that the Panama Papers are not a fully-fledged “leak” as such. The papers’ public debut in April was fully edited and aimed to unveil the offshore activities of only a few world leaders and their families. The intent of John Doe (the nickname of the person behind the leak), Süddeutsche Zeitung and the International Consortium of Investigative Journalists (ICIJ) was not to reveal private details or disclose secret deals. 

The aim of the Panama Papers was to show that a perfectly legal system could be used by the ill-intentioned to perpetrate crimes. “Generally speaking, owning an offshore company is not illegal in itself,” the Zeitung wrote, echoing the caveat that every article on the Panama Papers places high up on its page. This odd concern for privacy may be the key to understanding the decision to redact the documents and restrict access to the leaked files. 

Instead of allowing the public, or the authorities, to see the data, Costas Efimeros at The Press Project argued that the editing of the leak fails to show the full picture. “The scandals are presented by systemic media in the usual fashion: as the efforts of some evil, greedy capitalists who did not respect the holy law of the markets and sought to exploit the system for their own benefit.” This does not fully reflect how supply and demand for offshore shelters interact, especially in the case of Central Asian figures. 

Both western havens and intermediaries are, as Cooley said in an e-mail, “more important than ever”. Rather than the informal backroom deals of swashbuckling individual gatekeepers such as James Giffen in the early 1990s, intermediary work has become the professionalised domain of immense law firms. “These services are legal, but are designed to globalise the assets and maintain the privacy of individuals from the region,” Cooley argued, alluding to the role of the likes of Mossack Fonseca.

After all, as Cooley and Heathershaw have previously argued on the pages of openDemocracy, “the liberal west is not a bystander in Central Asia’s troubles, it plays host to dictators’ asset grabs and power plays.” 

The myth of Central Asia as peripheral to western economic practices has become a hindrance to serious discussion on the region’s failed democratisation. In addition, the concept that the demand side alone creates corruption is also misleading.

What the Panama revelations have made abundantly clear is that autocratisation doesn’t occur in isolation. It’s a transnational process shaped by the same market mechanisms used by western multinationals. In order to satisfy demand for corruption, tax havens and cash shelters, Central Asians elites need the west to supply them with the tools for circumventing laws and public scrutiny. 

What do you think? Join us at the London School of Economics on 8 June for "Politics of Plunder" to discuss offshore practices, authoritarianism and the post-Crimea world order. Find more of openDemocracy's coverage here.  

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