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Then Russia's Prime Minister Vladimir Putin meets with supporters in Moscow in this Dec. 1, 2011 file photo. (POOL/REUTERS)
Then Russia's Prime Minister Vladimir Putin meets with supporters in Moscow in this Dec. 1, 2011 file photo. (POOL/REUTERS)

How a medical project helped build Putin’s mammoth estate Add to ...

In 2005, President Vladimir Putin personally ordered up a vast program to improve Russia’s poor healthcare facilities. Five years later, authorities found that suppliers were charging some hospitals two or even three times too much for vital gear such as high-tech medical scanners.

Dmitry Medvedev, serving as Putin’s hand-picked successor at the time, went on national television to denounce the alleged scam. The perpetrators, he said, had engaged in “absolutely cynical, loutish theft of state money.” Medvedev instructed Russia’s top law enforcement agencies to make sure that “everyone who participated in this is seriously and sternly punished.”

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Suspects were rounded up in far-flung places, and in 2012 the police ministry said 104 people had been charged in connection with overpriced scanners. Several local officials and business executives were convicted of fraud and sent to prison.

But a Reuters investigation has found that two wealthy associates of Putin engaged in the same profiteering and suffered no penalty.

They sold medical equipment for at least $195 million to Russia and sent a total of $84 million in proceeds to Swiss bank accounts, according to bank records reviewed by Reuters. The records also indicate that at least 35 million euros ($48 million) from those accounts were funneled to a company that then helped construct a luxury property near the Black Sea known as “Putin’s palace” - a nickname earned after a businessman alleged that the estate was built for Putin. The Russian leader has denied any connection to the property.

These findings are part of a Reuters investigation into how associates of the Kremlin profit from state contracts in the Putin era. This and a later article examine what became of the president’s grand hospital undertaking. Another story, drawing on a confidential database of Russian bank records, will explore billions of dollars in spending on state railway contracts.

The wealth of Putin’s comrades has come under global scrutiny amid sanctions imposed by the United States and Europe on the president’s associates over the crisis in Ukraine.

Russia has been renowned for graft since the Soviet Union fell a generation ago. Under the first post-Soviet leader, Boris Yeltsin, “oligarchs” gained control of state-owned industries and grew fabulously wealthy. Those wild days are long over.

Yeltsin’s successor, Putin, has restored much of the nation’s most lucrative industries, such as oil and gas, to state control. Many citizens feel Putin’s Russia is a vast improvement from the chaos of the Yeltsin era. Putin, a former KGB officer, has brought order. Rising oil prices have driven growth. Russia’s economy has more than doubled on his watch, measured by income per head.

But corruption remains a deep-seated problem. The path to wealth today, say independent economists, lies not in seizing government assets but in tapping the vast flow of business the state does with the private sector.

“The current system in Russia is based not on corruption in the traditional sense, but on a complete merger of public service and private business interests,” said economist Vladislav Inozemtsev, director of the Institute for Post-Industrial Studies, a think tank in Moscow.

One reason the well-connected can game the state contracting system: In Russia, doing so may be perfectly legal.

Lax rules, poorly enforced, make it possible for state entities to give contracts to companies that do not disclose their owners or have no presence at their registered address. Russian legislation doesn’t expressly forbid collusion or ownership affiliations between competitors in public tenders. It is in this grey zone, more so than in outright theft, that graft flourishes in Putin’s Russia.

Faced with widespread suspicion that sleaze remains rampant, Putin has responded by declaring war on corruption. In November, he said: “We will tear out this infection from its roots.” In December, he ordered the creation of a “counter-corruption directorate,” according to a Kremlin announcement.

Opponents of Putin have been leveling charges of cronyism and favoritism against him for years. What they haven’t done is detail how the president’s associates actually extract money from the government.

In the hospital project, significant sums ended up in the hands of intermediaries with links to Putin: Profits that could have provided additional facilities or badly needed services in Russia.

The two associates of Putin who supplied medical equipment acted as middlemen in deals with the Russian state worth at least $195 million. They made profits by buying high-tech medical equipment through a British company they controlled and selling it on to Russia at much higher prices - sometimes double the market rate.

Much of the equipment came from the German multinational Siemens AG. Siemens sold its products to the British company, which then sold the equipment on to Russia - and some of those imports fetched prices at or above those described by Medvedev as “cynical, loutish theft.”


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