The End of Putinomics

by Owen Matthews

A dozen years of prosperity and stability have kept Russia’s leader wildly popular. Now his whole world is about to collapse.
The world is changing. Russia is not. And Vladimir Putin would like things to stay that way. Stability has been his No. 1 selling point ever since he came to power 12 years ago. Even prosperous Muscovites—people who don’t much care for their president’s brand of Soviet nostalgia, his macho nationalism, or his KGB-style crackdowns on dissent—mutter among themselves that for all his regime’s flaws, its predictability is still preferable to the wild upheavals of the

And who can blame them? Over the past century, Russians have seen their full share of excitable demagogues, from Bolsheviks to capitalist shock therapists, all of them promising big changes for the better, and most of them dismally failing to deliver. If graphic designer Shepard Fairey were to make the equivalent of his Obama “HOPE” election poster for Vladimir Putin, it undoubtedly would say “NO CHANGE.” Th at reassuringly solid sense of permanence is why more than 60 percent of Russians say they still love Putin after all these years.

Unfortunately for the Russian president, however, change is imminent—and in a form utterly beyond his control. Two words have already begun rocking Putin’s world: shale gas. The new technology, which allows natural gas to be extracted cheaply and in previously untapped places, is about to upend not only global energy prices but also the geopolitical status quo—with Russia as the prime loser.
For more than a decade, rising oil and gas prices have kept Putin’s Russia aloft. The entire unwieldy apparatus, from massive military spending to the magical thinking of Putin’s lowtax, high-spend policies, is based on petro-wealth. When Putin was anointed as Boris Yeltsin’s successor in 1999, oil stood at $17 a barrel. Today it’s bumping along at roughly $110. Th at windfall is the secret of Putin’s economic miracle, of his popularity, and of his arrogance.
But 2013 is shaping up to be the year when the magic stops. Putinomics is in many ways like a gigantic Ponzi scheme. Free money comes bubbling out of the ground; the government and its cronies skim off a sizable chunk, and then spend the balance on keeping the people happy—subsidizing a vast and antiquated military-industrial complex, for example, thereby ensuring plenty of steady jobs for defense workers. But just like a Ponzi scheme, it works only as long as supplies of new cash keep growing.
And Russia’s fountain of loot is beginning to dry up. Although crude-oil prices have stayed pretty firm, propped up by rising Chinese demand and continued unrest in the Middle East, world natural-gas prices have fallen through the floor. In the past five years the United States has overtaken Russia as the world’s largest natural-gas producer, and U.S. domestic prices are a quarter of what Russia’s gas giant, Gazprom, has been trying to charge in Europe. Liquefi ed natural gas (LNG), another growing piece of the global energy market, is trading at half the Russians’ price, which is indexed to crude oil.

The impact is already apparent at Gazprom. The state-owned company employs nearly half a million people and accounts for 8 percent of Russia’s GDP; its taxes constitute roughly 20 percent of the state budget. And according to preliminary figures, its profits fell by half in the last quarter of 2012. Its total stock value has plunged from $365 billion in May 2008 to $120 billion as of this writing.

The road ahead looks no less grim. Although Gazprom remains the supplier for a quarter of Europe’s gas, customers slashed orders and negotiated price discounts worth $4 billion in 2012 alone. Worse, the European Union is investigating Gazprom for allegedly “preventing the diversification of supply of gas” and “imposing unfair prices on its customers by linking the price of gas to oil prices.” A $20 billion exploration project under the Arctic Sea was supposed to open Russia’s first new gasfields since the 1960s, but it has been shelved after foreign partners dropped out, citing lack of demand. For the foreseeable future, natural-gas prices are headed only one way: down.
Putin likes to think of his country as an energy superpower , and it’s true that Russia remains the world’s biggest energy exporter. But shale gas and LNG have broken Gazprom’s stranglehold on Europe’s energy supply. Th at in turn is leading to a profound shift in the relationship between Russia and Europe. A decade ago, Putin counted then German Chancellor Gerhard Schroeder among his closest friends and shared traditional Russian saunas with him (not to mention signing him up for a cushy job at Gazprom when Schroeder retired in 2005 ). But Schroeder’s successor, Angela Merkel, is not so shy about taking Putin to task for human-rights abuses.


Certificat Energetic Bucureşti

Insight: How Colombian drug traffickers used HSBC to launder money

(Reuters) – When several Colombian men were indicted in January 2010 on money-laundering charges, the case in Brooklyn federal court drew little attention.It looked like a bust of another nexus of drug traffickers and money launderers, with mainly small-time operatives paying the price for their crimes.

One of the men was Julio Chaparro, a 48-year-old father of four who owned three factories that made children’s clothing in Colombia.But to U.S. authorities the case was anything but ordinary. Chaparro, prosecutors alleged, helped run a money-laundering ring for drug traffickers that took advantage of lax controls at UK-based international banking group HSBC Holdings Plc. It was one of the most important leads for U.S. investigators pursuing a case against the bank that eventually led to a $1.9 billion settlement on December 11.Chaparro was “basically putting the orchestra together” and investigators saw “him as a major player in terms of cleaning a lot of money,” said James Hayes, special agent in charge of Homeland Security Investigations at U.S. Immigration and Customs Enforcement in New York. Known as ICE, the agency and its task force led the probe.

The Colombian’s lawyer, Ephraim Savitt, said Chaparro was a middleman in the operation, but disputed the extent of his client’s role, saying he was the “page turner of sheet music for the conductor.”

Chaparro, who was arrested in Colombia in 2010 and extradited to the United States in 2011, pleaded guilty to a money-laundering conspiracy count in May and is awaiting sentencing in 2013.

An HSBC spokesman declined comment.Much about the trail that drug traffickers used to move U.S. dollars – the proceeds from drug sales – through HSBC and other banks remains unclear. By design, the process is layered to evade detection.But a review of confidential investigative records that originate from two U.S. Attorney office probes and federal court filings in New York and California, as well as interviews with senior law-enforcement officials, shows how investigators tracing the activities of people who allegedly worked with Chaparro were able to expose large-scale money laundering at one of the world’s biggest banks.The federal law-enforcement task force – named after El Dorado, the mythical city of gold in South America – used wire taps, email and computer searches, information from at least one inside source, and old-fashioned surveillance, to piece together the ring’s operations.Drug cartels sold narcotics in the United States and routed the cash to Mexico, often using couriers to smuggle it across the border. That cash would then be put into bank accounts at HSBC’s Mexico unit, where large deposits could be made without arousing suspicion, according to U.S. Department of Justice documents.In one filing, U.S. prosecutors said, Chaparro and others allegedly utilized accounts at HSBC Mexico to deposit “drug dollars and then wire those funds to … businesses located in the United States and elsewhere. The funds were then used to purchase consumer goods, which were exported to South America and resold to generate ‘clean’ cash.”In a typical transaction, a middleman in a drug cartel would offer to deliver consumer goods, such as computers or washing machines, to Colombian businesses on favorable terms. Another person in the United States would buy the goods from firms using funds from drug trafficking, and fulfill those orders.Money launderers exploited the laxness of HSBC in policing shadowy money flows, the Department of Justice said earlier this month. Failures included not conducting due diligence on customers, not adequately monitoring wire transfers or cash shipments and not having enough employees to run anti-money laundering systems. U.S. Assistant Attorney General Lanny Breuer called the lapses “stunning failures of oversight.”The situation was so bad, according to the Department of Justice, that in 2008, the head of HSBC’s Mexican operations was told by Mexican regulators that a local drug lord described the bank as “the place to launder money.”The Chaparro probe, led by ICE and the Justice Department, converged over the past two years with two other investigations – led by federal prosecutors and investigators in West Virginia and by the Manhattan district attorney – resulting in this month’s settlement with HSBC.HSBC and its employees avoided criminal indictments, as the bank agreed instead to a deferred-prosecution deal that forces it to strengthen controls and accept a compliance monitor.

Today, Chaparro sits in a federal detention center in Brooklyn, reading the Bible and awaiting sentencing, said Savitt, a former U.S. prosecutor in Brooklyn, who submitted a list of questions to Chaparro for Reuters.”He is contrite, regretful and ashamed about his crimes,” Savitt said. “He wants to serve his time and rejoin his family. He understands that a prison term could prevent that from happening for many years.”Under federal guidelines, he could face 15 to 18 years in prison.

The El Dorado federal task force, based in a building on the west side of Manhattan near Chelsea Piers, serves as an umbrella organization for some 250 law-enforcement officials from state, local and federal agencies.One of the task-force supervisors is Lieutenant Frank DiGregorio, a former New York detective who spent years tracking the so-called Black Market Peso Exchange, which is used to convert dollars to Colombian pesos through trading in goods. DiGregorio along with two younger investigators – Graham Klein and Carmelo Lana – led the HSBC case.

The overall probe began in 2007 when investigators analyzed how courier companies ferried cash through airports in Miami and Houston, a person familiar with the case said. They ultimately tracked that to HSBC’s operations in Mexico and then connected it to funds moving through New York.

A tipping point in the investigation came in 2009 when El Dorado agents arrested a man named Fernando Sanclemente. Two sources familiar with the case say Sanclemente was an operative in Chaparro’s network.Sanclemente, who was charged with allegedly conducting financial transactions tied to narcotics trafficking, is free on bail with a $200,000 bond, according to the latest court docket entry, which dates to January 2012. His lawyer, James Neville, declined to discuss the status of the case.According to a criminal complaint filed against him by Lana, the El Dorado agent, on June 30, 2009, task force agents followed Sanclemente for more than two hours as he drove around Queens in New York to ferry cash from drug sales.Sanclemente first met with a person for about “30 seconds” on one street corner, and left with a yellow plastic bag. Later that night, he drove to a Dunkin’ Donuts near LaGuardia Airport, where a black livery cab pulled up and the driver handed him a black bag.

The El Dorado team followed Sanclemente to Laurel Hollow, New York, some 40 minutes away, where the investigators stopped and searched him, finding about $153,000 in the two bags. At Sanclemente’s apartment, investigators said they found ledgers and documents consistent with money laundering.

With the arrest, investigators gained insight into Chaparro’s alleged transactions. At one point, investigators set up undercover bank accounts where they were able to get Chaparro’s network to wire proceeds that could be traced back to HSBC’s Mexico operations, according to people familiar with the situation and a Department of Justice filing in the HSBC case.

Federal agents would ultimately home in on $500 million that had moved from HSBC Mexico to HSBC’s operations in the United States, according to the confidential investigative records.

Between October 6, 2008 and April 13, 2009, Chaparro and others conducted money laundering transactions totaling $1.1 million tied to narcotics trafficking, the indictment against Chaparro alleged.