Dispatch

Rubles in the Sun

Is Vladimir Putin the big winner of the Cypriot banking crisis?

MOSCOW — The last time a crisis on a faraway island was this much of a headache for Moscow -- as Russians have recently taken to joking -- was in 1962, and the issue was missiles, not bank deposits. The news out of the Eastern Mediterranean in the last two weeks has been increasingly dire, particularly from a Russian point of view. First there was the strong-arm bailout deal pushed on Cyprus by the European Union, which included a 9.9 percent tax on large deposits, many of them held by Russian businesses and individuals. Then came the news that the second biggest bank on the island, the Cyprus Popular Bank, will go bankrupt. Hundreds of bank accounts filled with billions of euros saved by rich Russian individuals or invested by Russian private and state companies have fallen under threat of being partly expropriated, or at least frozen. Granted, the consequences aren't quite on the scale of a global nuclear war, but the closure of Cyprus as an offshore banking center means that an integral aspect of how well-heeled Russians have conducted business for the last two decades is coming to an end.

Publicly, at least, the Russian government doesn't approve of Russia's one percenters shipping their capital overseas. "In my view they continue stealing what's already been stolen," Prime Minister Dmitry Medvedev said of the new Cypriot tax, paraphrasing Vladimir Lenin's defense of robbery by Bolshevik revolutionaries. But while nobody really knows exactly how much Russian money is sloshing through Cypriot banks, it's clear that some of those affected are close to the center of Russian political power.

According to the credit rating agency Moody's, Russian corporations, including state gas giant Gazprom, kept more than $30 billion in deposits on the island. On top of that, many powerful Russian individuals transferred money to their Cyprus saving banks hoping to one day live happily in a comfortable place with good medical service, transparent courts, and a more humane climate. Those dreams have gone down the drain and the dreamers want answers.

Just like any story about Russia, the Cyprus saga has several chapters. During the years of privatization in the early and mid 1990s, the first generation of rich Russians did not believe the country's free-market system would stay in place for long. They preferred to keep their winnings in offshore accounts -- an arrangement that had the added benefit of significant tax savings. After Vladimir Putin and his circle of former secret police officers took power, the country's economic elite divided between those who fled the country, including the recently deceased billionaire Boris Berezovsky, and those who stayed behind, willing to play ball with the heavy-handed new regime. But no matter where these tycoons lived, their money tended to reside in Cyprus.

Over the past decade, the worst fears of many Russian businessmen came true: it became close to impossible to keep a business registered in Russia without the constant threat of a hostile raid by tax authorities, a problem known by the pseudo-Russian word "raiderstvo."

"If your business was registered with Inspection #46, the major inspection office in Moscow, anybody any day could pay the girl at the counter $1,000 and re-register your business in their names," Moscow-based analyst Yuri Krupnov said, explaining the mechanism these raiders used. "It still remains a common trick for taking over businesses and nobody can prove the truth," said Krupnov, an adviser for the Kremlin. Under these circumstances, it's not surprising that Russian businesses preferred to register in comparatively stable Cyprus, which was barred by treaty from exacting a double tax on the deposits.

There's certainly been a fair amount of schadenfreude directed at the tax refugees in the wake of the Cyprus collapse.  Last week, a Duma deputy from Belgrad demanded the publication of a public list of all Russians with money in Cyprus, "so we could see who is the patriot and who is a Cypriot." The unhealthy curiosity reflected common public opinion: "Those who are losing money in Cyprus today prefer not to talk about it and businessmen keeping money in Russia happily laugh at victims of the crisis, " said Mikhail Krylov, leader of Opora, a national organization for small and medium business.

The oligarchs Alexander Lebedev and Mikhail Prokhorov -- both associated with the "liberal" political opposition -- have been willing to admit that they have been caught up in the Cyprus crisis, while brushing off its significance. Lebedev admitted that he was losing around $10,000 in the raid on his Cypriot bank deposits, but told the Guardian it was "not worth talking about." Prokhorov said in an interview on the network Rain TV that he had registered shares of his Onexim LTD holding company on the island.

Other prominent "Russian Cypriots" whose holdings are public knowledge include Russia's richest man, Alisher Usmanov; energy trader and friend-of-Putin Gennady Timchenko; as well as the president's old judo buddy in St. Petersburg, Arkady Rotenberg, who has close connections to Gazprom.

Working under the mindset that everything in the world circles around Russia, many in Moscow complain that the reason Germany engineered the deal was in order to punish tax-dodging Russians. "It looked like expropriation of assets in the Bolshevik style -- there must be a generalization that all Russian money was stolen and therefore their owners should be treated like robbers," said Igor Bunin, the head of Center for Political Technologies, one of Russia's oldest think tanks.

But after an initial round of outrage when the bailout was first announced, Putin and his senior officials have been relatively quiet about the events. In the end, there may even be a silver lining for the president. With their favorite tax havens closing up shop and new U.S. legislation threatening sanctions against them for human rights reasons, Russian elites may be more inclined to keep their money in the country, which would make them more dependent on the good favor of the president.

PATRICK BAZ/AFP/Getty Images

Dispatch

Welcome to Cocainebougou

Amid the drug palaces of northern Mali, it's easy to see why this war will be hard to win.

GAO, Mali — There is nothing subtle about the garish mansions of the neighborhood locals call "Cocainebougou," or Cocaine Town.

The houses rise three, four, five stories from the ground and can be seen from blocks away. One has a pair of fake marble pillars at the top of the short staircase leading to the front door. Another has a driveway enclosed by arched metal doors decorated with carvings of flowers and vines. A third has an enormous open-air balcony lit by bronze friezes and ringed by ornamental fencing painted a disconcertingly bright shade of red. The houses are said to have cost more than $300,000 to build, an enormous sum here.

They belong to the local, predominantly Arab, drug traffickers who have for decades raked in vast sums of money from their involvement in northern Mali's expansive and highly lucrative narcotics trade.

The United Nations Office on Drugs and Crime estimates that more than $1.25 billion of cocaine, hashish, and other drugs bound for Europe travel along smuggling routes which pass through Mali and other West African nations each year, and former Nigerian president Olusegun Obasanjo described northern Mali earlier this year as "a den of drug trafficking, extremism, and criminality." Even a tiny sliver of the drug money which pours through the region each year would be more than enough for a local kingpin to build a nice house in Cocainebougou.

And there are many here. But now, mostly, they sit empty. The Arabs who owned and lived in many of the mansions in Gao fled a few months ago, when French forces ousted the Islamist fighters who had controlled the city, fearing reprisals from locals who saw them as de facto allies of the extremists.

During a recent visit to the neighborhood I asked my translator, a sweet-natured soccer fanatic named Ibrahim, what would have happened to the Arabs if they had stayed.

"They'd have been killed, of course," he said matter-of-factly.

Ibrahim led me through a house that had systematically been looted of furniture, electronics, doors, sinks, light fixtures, tile flooring, and toilets. The robbers, he pointed out, had even managed to rip the copper electrical wiring out of the walls.

The mansions of Cocainebougou are more than just a morbid tourist attraction, however. They are also a vivid illustration of why it will be so hard to fully defeat the shadowy Islamists who until recently ruled the north.

Drug use is strictly prohibited under Islamic law, but militant groups like Hezbollah in Lebanon and the Taliban in Afghanistan have long profited from turning a blind eye to -- or actively participating in -- the sale of hashish and other drugs cultivated in their territories. During my own reporting trips to Afghanistan in recent years, local opium farmers told me that the Taliban run a sophisticated drug operation, sending couriers to purchase their harvests in cash, processing much of the opium themselves, and then working closely with drug smugglers to ship the finished product to Europe. U.S. military officials estimate that the Taliban reap more than $200 million a year from drug sales.

A similar dynamic has emerged here in Mali, where the Islamists used their time ruling the north to forge close ties to many of the region's local drug lords. Western and Malian defense officials say militants from al Qaeda in the Islamic Maghreb (AQIM) and the Movement for Oneness and Jihad in West Africa (MUJAO) basically run an old-fashioned protection racket, offering the smugglers a free hand to safely move their product through the north in exchange for a hefty tax of 10-15 percent of the total value of the drugs.

The officials said the Islamists have gone even further in recent months, sending small groups of armed militants to physically escort drug convoys through the increasingly lawless north. The extremists, the U.S. State Department says, "provide protection and permissions for traffickers moving product through areas they control."

There's a simple reason that Mali's Islamists have been willing to step up their cooperation with local drug dealers in recent months: sheer necessity. Drug money is far more important to Mali's militants than to those of Lebanon or Afghanistan, which also receive significant funding from other governments or wealthy donors in countries like Saudi Arabia. Malian militant groups like AQIM, by contrast, receive virtually no outside funds, so taxes on the drug shipments that pass through the north is the primary way they raise the money they need to pay fighters and purchase new weaponry.

"They get some money from kidnapping Westerners, but nothing like what they get from the drugs," Col. Didier Dacko, the top Malian military commander in northern Mali, told me in an interview. "It's their lifeblood."

But with some 4,000 French troops on the ground, and Islamists scattered, that blood is running thin. Still, the Islamists' ties to the drug traffickers remain largely intact, and their current attempts to reconstitute themselves in the most remote parts of northern Mali means that they will again be in position to help the smugglers in exchange for cash. That, in turn, suggests that the extremists will be able to fund their operations well into the future.

Mali's growing role in the global drug trade first attracted widespread public notice in November 2009, when authorities found the burned-out wreckage of a Boeing 727 thought to be carrying between 5 and 10 tons of cocaine at a makeshift desert runway not far from Gao. Malian and U.N. officials later said that drug smugglers flew the plane in from Venezuala, unloaded the cocaine, and then torched it when they couldn't get the plane to take back off.

Drug cartels throughout Latin America see northern Mali as an ideal staging point -- it is situated roughly halfway between South America and Europe and has long been largely beyond the reach of the fragile central government in Bamako. The government, even before the active rebel movement began last year, traditionally stationed only token numbers of troops in the north, and most were in major cities like Gao rather than in the remote regions that are home to most of the country's smuggling routes. That made it easy for drug smugglers and their Islamist allies to either bypass or buy off the poorly trained Malian soldiers.

The new Malian government is trying to change that. A senior Malian military official in Bamako, speaking on condition of anonymity to discuss upcoming operations, said his government and neighboring countries like Chad will soon launch a concerted effort to interdict drug shipments by stationing more ground troops in remote parts of the north and using aerial imagery from French and U.S. planes and drones to identify specific smuggling routes.

Still, he admitted that it will be difficult, and potentially impossible, to end or significantly degrade Mali's drug trade. Smugglers and Islamists have been traversing the terrain for decades, he said, and the Malian troops will be deploying there in force for the first time.

"I would like to say we'll be able to stop the smuggling, but that would be a lie," he told me. "They know every cave and every little path. We'll be lucky to find half of them. But every shipment we stop will help starve the terrorists of money."

In the meantime, the mansions of Cocainebougou are beginning to take in new residents. A squad of Malian Special Forces have occupied a pair of houses and are busy moving into a third. Two of the soldiers, each wearing a tight-fitting black t-shirt -- emblazoned with crossed AK-47s, a sword, and a lion's head -- walked up to me when I was taking photos of some of the houses. "You have to leave," they said.

I told them that Colonel Dacko had specifically told me to see Cocainebougou for myself. They said they didn't answer to Dacko or recognize his authority. When I asked who they did answer to, the soldiers silently glared at me.

I should move on, they said a few uncomfortable moments later, for my own well-being.

"We have a sniper on the roof, and he might mistake you for a threat," one told me.

I took a few more pictures as Ibrahim briefly distracted the soldiers with talk of a recent Real Madrid match and we piled back into his car. We could see the mansions of Cocainebougou in our rear view mirrors as we drove away, the empty buildings looming over the surrounding one-story houses.

Yochi Dreazen