By John Helmer, Moscow
Yury Trutnev, the Kremlin’s special representative for the Russian Fareast, has come up with a scheme, starting this month, for storing the world’s most valuable art works in Vladivostok, one of the world’s smallest art markets, with the personal backing of President Vladimir Putin; and on the advice of Dmitry Rybolovlev, the art-collecting oligarch exiled to Switzerland and Monaco, who is charging Yves Bouvier, the French operator of comparable art storage schemes in Europe, with multimillion dollar art fraud.
This tale was published in Mediapart, a French internet publication, on October 11. It was translated into Russian and published two days later. Not a shred of evidence has since been found to substantiate it. Desperation measures then, but for whose benefit?
Free trade, tax holiday, and customs relief projects have been tried across Russia for twenty years as a method for stimulating investment outside the big-city magnets and the oil-production districts. The result in fareastern regions like Chukotka has been tax fraud, as the state auditor, the Accounting Chamber, ruled against Roman Abramovich and Oleg Deripaska, then owners of Russian Aluminium (Rusal), in 2004.
A more recent attempt at a scheme called a Special Economic Zone in the western region of Kaliningrad failed to generate more growth in the region than was the countrywide average, and significantly less rapid growth than Moscow, St. Petersburg and several other regions lacking the tax and trade favours. For details, read this.
A Polish study of the impact of the Special Economic Zone for Kaliningrad between 2006 and 2012 has reported “the benefits offered have failed to bring about a rapid development of the region; around 50 businesses were residents of the zone in 2011. Over the five years of the zone’s operation, these businesses have only invested around US$120 million in this region… Despite the privileges granted to Kaliningrad oblast, it is significantly below the Russian average in terms of economic development – its Gross Regional Product (GRP) per capita is still at around 60% of the Russian average.”
Putin has publicly promised to do much to bridge the regional gap, and promote the development of fareastern industries like steelmaking, ports, ship-building, and mining. He has purged several regional officials for corruption. Some of the resulting schemes – for example, a tungsten mining project of 2009 and a steel scrap export port measure of 2011 — proved disastrous for almost everyone, lucrative for a handful. The combination of shipping oligarch Ziyavudin Magomedov, Prime Minister Dmitry Medvedev, and Primorsk Krai administrators has launched several bandwagons, particularly in the run-up to the summit conference of the Asia-Pacific Economic Cooperation (APEC) states in September 2012. The investment results have been poor.
The Russian results have been much poorer than comparable Chinese government free-trade zones in Tianjin, Shanghai, Fujian, and Guangdong.
Last December, in his annual address to the Federal Assembly, Putin announced a fresh initiative for a “lightening” of taxes in and around Vladivostok. When the State Duma began voting on the government’s implementing measure, deputies promised visa-free treatment for foreigners investing in the zone; customs and VAT relief; and a variety of other business stimulants conditional on investment pledges, according to agreements signed between the zone authority and the candidate zone residents. The payoff for the scheme, it was claimed in the Duma debate, would be the creation of 470,000 new jobs and the multiplication of the Primorsk Krai’s GRP by 3.4 times by the year 2034. The text of the law can be read here.
Implementation by the Ministry of the Development of the Russian Far East (Minvostokrazvitia) formally started last week with the issuance of regulations, and the selection by the zone’s supervisory board of the first candidate residents. Although called the Freeport of Vladivostok, the territory of the zone is much wider than Vladivostok, and includes the port of Zarubino, on the North Korean border where Magomedov has proposed big projects of his own. For his version of what the Freeport scheme will mean for him, read this.For Magomedov’s record of project investment, start here.
Trutnev is the chairman of the freeport board, and here are his considerable powers.
Trutnev, now 59, was born and raised in the city of Perm. He grew up to become the mayor of the city, then the governor of the region. In 2004 he was appointed to be Minister of Natural Resources in the federal government, where he was in charge of the licensing of gasfields, oil wells, and mineable resources, including Perm region favourites, oil, gas, potash and diamonds. The term for Trutnev’s 8-year record at the ministry is controversial. It can be followed from start to finish here.
In 2009, after Trutnev reported the largest personal income of the ministers in then-President Medvedev’s cabinet, local elected officials, newspaper reporters, and editors in the Perm region were invited to name three positive things they remembered Trutnev as having done when he was mayor or governor, and one negative thing. Noone managed to recall a single negative. But they were also stumped for positives. According to the editor in chief of Perm News, Yury Puzniansky: “there were no incidents nor any scandals during the time Trutnev was mayor or governor. He was very silent.” Arkadiy Kamenev, Trutnev’s successor as mayor, said: “I do remember his lobbying of a former army building to pass to a church school, and several things like that. I do not remember any very big faults, or anything like that.” A source in the governor’s office said: “We remember Trutnev as a nice man, very powerful and ambitious.” Trutnev’s deputy in charge of mine licensing, Oleg Mitvol, sued in Moscow court to express a different assessment.
Mitvol got nowhere; Trutnev got promoted. After Putin took back the presidency from Medvedev in May 2012, Trutnev was moved out of his line job and into an office called Assistant to the President. He stayed there for fifteen months. In August 2013 he was moved further away and out of Moscow, becoming the presidential representative to the fareastern region, with the rank of deputy prime minister.
Reputed by Mitvol to have served powerful business constituents in oil, gas and hard-rock mining when he was minister, Trutnev has championed fresh schemes for clients in his new stamping-ground. One to have been stymied by local opposition from the Republic of Sakha and the state diamond-mining monopoly Alrosa has been Trutnev’s scheme for a new state-subsidized diamond manufacturing industry in the region. This is intended to replace the state-subsidized diamond manufacturing industry bankrupted by a decade of corruption and smuggling. The outcome of Trutnev’s campaign against Alrosa can be followed here.
Alrosa has rejected the proposal from Trutnev to establish diamond manufacturing in the freeport. It has been less categorical, though not more enthusiastic, towards another scheme from Trutnev to establish an exchange for diamond trading in the freeport. Diamond dealers acknowledge that there is international buyer demand for discount-priced rough and cut diamonds, and that if Alrosa could offer tax cuts, sales turnover would increase. The Sakha government also holds the right to sell rough diamonds directly, and may be interested in freeport discounting schemes. Trutnev and foreign diamond traders may be calculating that they can develop a trade to undercut Alrosa for price.
Today in Vladivostok it is reported that Trutnev and his board have approved the first bids to qualify for the freeport’s benefits – Magomedov’s Zarubino port scheme, and a proposal from the Pacific Investment Company to establish a 5-star hotel called the Slavyanka. Both approvals are conditional, Trutnev told the press, on the investors stumping up the project financing. Local media report thirty odd regional business concerns are bidding for freeport benefits, including fishing fleet and fish processing companies, ship repair and shipbuilding concerns.
No application has been lodged for a warehouse to store or trade artworks, according to Minvostokrazvitia.
Minister Alexander Galushka (right) claimed in July that the Vladivostok freeport might be comparable to those in Geneva, Luxembourg, and Singapore. He added that he thought the freeport might be “where you can store items of luxury, art, and antiques; and to carry out preparation for their sale [including] demonstration of the goods to potential buyers.” A press release from his ministry last week anticipated the freeport might house a casino for tourist gamblers like those using Macau. The report suggested the freeport might also become “a place of storage of goods, jewellery, luxury goods.”
The ministry has confirmed it has sent officials to Luxembourg to discuss how they operate their freeport. But no details of an art storage scheme have been reported since then. Trutnev refuses to say if he is contemplating an artworks warehouse in Vladivostok.
Russian art dealers say believe there is no Russian demand for it, and unlikely to be demand from Chinese, Korean or Japanese collectors. According to a Vladivostok gallery source, the scheme is “quite hard to imagine how it’s going to be, because Vladivostok has never been an art centre, and doesn’t have big art market.” An expert on the art market in Vladivostok said she doubts that among foreign collectors will be many who want to post fortunes there. “In the Pacific region,” the source said, “they are using Singapore port. For a project to be successful one needs not only the repository itself but also a developed market and [sales] infrastructure.”
A leading international dealer in Russian art said he “would be surprised if Russian art buyers considered Vladivostok a safer alternative” than current warehouses in Geneva, Luxembourg and Singapore. Because of European Union sanctions against Russia and Russian businessmen, in which Luxembourg is participating, Switzerland partially, the source believes that Singapore may be favoured. He adds: “I have not heard of paintings in warehouses being frozen or seized. In any case, none of our clients has been subject to sanctions and I have not heard of them being any more anxious about risks in warehouses. If they were worried, I would have thought taking the works into their homes or yachts in Europe or Russia would be a better alternative to Vladivostok.”
Are banks and investment funds financing acquisition of the highest-priced artworks likely to accept storage in Vladivostok, compared to Geneva or Singapore? An international art market expert said: “Most Russian art buyers use free cash, not loans to buy art. Where they do have loans secured by art in Europe then a lender would require control of the art in the warehouse, probably in Europe – that would preclude Vladivostok. Under US law lenders’ rights are greater, but some permit the borrower to keep his art, but in Europe the lenders always insist on control of the art.”
European bank sources believe that Rybolovlev may have lodged his artworks in freeport warehouses because of the loan conditions attached to his purchases. These sources claim also that Rybolovlev’s net worth (that’s net of his debts) has been far less than the billions of dollars he has advertised, or the $12 billion claimed in divorce court action in Geneva by his ex-wife. For background, read this. Her side in the case has publicly counted that Rybolovlev bought almost $3 billion in artworks out of the much larger sum he received when he sold his control shareholding in Perm-based potash producer Uralkali. In May 2014 the Geneva Tribunal of First Instance ordered Rybolovelv to pay Elena Rybolovleva $4.5 billion. In June 2015 an appeals court cut the award to one-eighth — $590 million. A final settlement of the litigation, announced this week by lawyers for the two sides, did not mention how much less than that Rybolovlev will have to pay.
Potash industry sources believe that while Rybolovlev exercised executive control at Uralkali until the change of shareholding control in 2010, he did not own the shares attributed to him. For background on the deal, read this. The real Russian shareholders, the sources explain, took the lion’s share from the Uralkali sale, leaving Rybolovlev with a small fortune they estimate at less than $1 billion. He has been leveraging that ever since, the Russian sources believe.
A European bank source familiar with Rybolovlev’s business believes the French media have exaggerated his wealth outside Russia, and his influence inside. He also believes Rybolovlev (below, left) has been pursuing his former art dealer Yves Bouvier (right) in order to convince his bank lenders and the art market
Rybolovlev has authorized a categorical denial of the Mediapart report that he has had anything to do with the Vladivostok freeport.
FOOTNOTE TO LEAD IMAGE:
Clive Goddard’s masterpieces aren’t stored in Vladivostok. They are safe in Oxford, England, where they can be viewed and purchased direct, without the intermediation of Yves Bouvier, Dmitry Rybolovlev, or Yury Trutnev. Try this.