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How much does a Russian distillery really cost?

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In Kirov, an incautious remark by Aleksei Navalny might result in five people going to prison for 10 years.

 

Ivan Zhilin
28 October 2014

On 2 July 2012, the hacker 'Hell' (probably a 40-year old Russian called Sergei Maximov), who works hand in glove with the FSB, published on his site, correspondence between Nikita Belykh, governor of the Kirov Region, and the opposition figure Aleksei Navalny, who had worked for him pro bono in 2009 as his adviser. The gist of this correspondence was as follows:

28.10.2010 Nikita Belykh: Hi, mate. Can we meet up? I shall be in Moscow on Sunday and Monday. [later on] Aleksey, have you taken leave of your senses? You don't even answer emails!

Aleksei Navalny: I've already answered. You always write the same stuff, but you never do anything. The debt is $152, for instance, but you have only paid me €40. So? We've been talking about this for years. The drinks factory was a steal, but still you don't settle your debts.

Nikita Belykh: You half-baked factory thief and timber industry embezzler, get lost!

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Nikita Belykh of 'Right Cause' was at one time viewed as a new breed of Russian politician. Photo: Ekaterina Loushnikova

The publication of this correspondence produced quite a furore; and both Belykh and Navalny had explanations to give. The governor said:

'What has appeared on the internet is our own personal affair; mine and Aleksei's. As for that bit in the correspondence about the Urzhum Distillery, it had been partially privatised (74.5%) before I became governor and was in complete compliance with the law. The phrase about the distillery having been 'stolen,' was said by Aleksei at the time when he had taken on the mantle of a mighty fighter of corruption. It seemed strange to him that the Kirov Region had disposed of its shares in the factory, but I think it's stupid to have shares if they don't allow you any control over what happens at the plant. So the regional government organised a public auction and sold the shares in the distillery, which were bought by the owner of the other 75%. This is what seemed strange to Navalny.'

Navalny himself said later: 'All the issues raised in the correspondence are nobody’s business except me and Nikita Belykh.'

'All the issues raised in the correspondence are nobody’s business except me and Nikita Belykh.'

On 18 December 2012, however, the Investigative Committee instituted criminal proceedings relating to the facts in the correspondence. This in itself gives rise to some questions. Article 50 of the Constitution of the Russian Federation forbids the use of evidence which has been acquired by breaking the law; and hacking into correspondence violates article 23 of the Constitution according to which 'everyone is entitled to conduct private correspondence, telephone calls, post, telegraph, and other communications. This right may only be restricted by court order.'

What crime?

In the opinion of the pre-trial investigation, the government of the Kirov Region sold its shares in the Urzhum Distillery at too low a price. The starting price for the 25.5%, offered at the auction, was 95,370,000 roubles ($2,271,435, the valuation arrived at by Marianna Popova and Maksim Devyatyarov, the experts of the Kirov state-owned enterprise 'Property Inventory Authority'). The selling price was 98,370,000 ($2,342,710). Investigators from the Central Investigations Department used another consultancy, which assessed the value of the package of shares being auctioned as 197,000,000 ($4,691,613). So it would appear that the regional budget lost out to the tune of 95,630,000 roubles.

It would appear that the regional budget lost out to the tune of 95,630,000 roubles.

However, it turned out that neither Belykh nor Navalny could be charged with anything. The governor had not signed a single document relating to the sale of the distillery (officials from the Regional Property Department had done this), and Navalny could have had nothing to do with the deal because he resigned from his post with the governor in 2009; and the deal was concluded in 2010.

But the wheels were already turning. The first suspect was Konstantin Arzamastsev, the director of the Property Department, who had signed the privatisation order for the 25.5% of shares belonging to the region. But Arzamastsev never made it to the dock; he fled abroad and was offered political asylum in Latvia in 2013. The first to be sent to prison were Marianna Popova and Maksim Devyatyarov from the Property Inventory Authority, who had valued the 25.5% package at 95,370,000. They were arrested on 24 January and sent to a remand prison.

The next to be arrested was Igor Burkov, general director of a company called 'Partner,' which had bought the shares at the auction. Then Alexander Kosulin, Kirov city Duma deputy, and Oleg Berezin, Regional Legislative Assembly deputy, were arrested on the grounds that 'Partner' is part of the 'Globus' group of companies, which belongs to Oleg Berezin, and which also own a large chain of food shops in Kirov. Kosulin also worked for Berezin.

Oleg Berezin was charged with using his influence in the region to persuade Arzamastsev to put the Urzhum Distillery shares up for auction at a reduced valuation. The investigating officers maintain that it was Berezin who set the reserve price. Arzamastsev needed to justify such a low valuation so he commissioned a valuation from Popova and Devyatyarov, letting them know in advance what sort of valuation he was expecting. Burkov, in his capacity as general director of 'Partner', duly bought the shares at this reduced price. Kosulin was allegedly the coordinator of the criminal group.

The day after the exchange of messages between Belykh and Navalny was published, Svetlana Zhurova, Kirov Region senator (and a political opponent of Belykh), sent a letter to the Prosecutor General asking him to investigate the information in the correspondence.

Investigations were carried out by the Kirov regional prosecutor and the deputy chairman of the regional government; the former concluded that there had been no infringement of the law; the latter that the regional budget had not been defrauded of any money.

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Navalny had worked pro bono as adviser to Belykh. Photo CC: Mitya Aleshkovskiy

Yury Tereshkov, the general director of the distillery, described what actually happened. 'A valuer called Petrov came and photographed the exterior of the plant, but not any of the production departments. Nor did he visit any of the enterprise's facilities outside the town of Urzhum. His eventual evaluation set a value of 27,000,000 ($643,155) for a warehouse in the village of Lazarevo, though who would pay that sort of money I cannot imagine. The distillery only spent 9,000,000 roubles ($214,385) on building it!'

'A valuer called Petrov came and photographed the exterior of the plant, but not any of the production departments.’

How much does a distillery cost

According to the Russian Civil Code (Article 421), the conditions for any contract are to be determined by the parties themselves. 'The market value of anything, including shares, is not what the assessor has said, but what satisfies the vendor and the purchaser,' as lawyer Alexander Nemov explains.

A study of the market for distilleries, shows that even leading Russian producers of spirits would not have valued the Urzhum Distillery shares at 777,000,000 roubles ($18,339,120), the amount the investigating officers assigned to the company.

In January 2012, information was leaked to the media stating that the Polish holding company CEDC (Central European Distribution Corporation) was selling the First Blending Works in Tula. This enterprise produces vodka well known in Russia – Stork and Green Mark – and, according to sources, was valued at $10,000,000 (310,000,000 roubles at the then exchange rate). The offer was subsequently withdrawn.

In December 2012, the Federal State Property Agency sold 49% of its shares in Yaroslavl Alcoholic Beverage Factory (much bigger than Urzhum – 2m decalitres a year as compared with 1,5m decalitres) for 82.34m roubles.

And in 2013, the government of Dagestan planned to sell the state-owned Kizlyarsky Cognac Factory (one of the five biggest cognac producers in Russia) for 100,000,000 roubles ($2,381,627).

In 2009, Alexander Danilov became general director of 'Urzhumka,' the sales company for the Urzhum Distillery. He commented on the situation surrounding the circumstances of the sale of the distillery: 'Until 2009 the market for alcohol production in Russia was growing. But in that year the government set up a new structure called the Federal Service for Regulating the Alcohol Market. The aim was to tackle the problem of alcohol abuse throughout the country: more stringent production requirements were introduced, and minimal prices for spirits, which led to a fall in production at Urzhum. This was discussed at shareholders' meetings, which I also attended. The situation has deteriorated to such an extent that the 13% of shares which 'Urzhumka' held in the distillery when I started work there, which were then worth 25-30m roubles ($595,668 - $714,823), would now not sell for 8m ($190,619).'

Notwithstanding these low market valuations, the people involved in the 'Urzhum Distillery case' are charged with collusive bidding in an auction, with intent to embezzle shares in the distillery. They are facing possible sentences of up to ten years in prison. But is this really a case about embezzlement and fraud, or more to do with the ongoing portrayal of Aleksei Navalny as a crook?

 

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