In March and April, the US government sanctioned Russian businessman Gennady Timchenko, his Luxembourg-registered holding company Volga Group, and ten related subsidiaries. Timchenko was identified as a “member of the Russian leadership’s inner circle,” whose involvement in the energy sector was “directly linked to [President] Putin.”
To date, Canada has sanctioned Timchenko, Volga Group, and nine Volga Group subsidiaries. The European Union has not acted against Timchenko or Volga Group.
Timchenko’s Volga Group companies operate in the energy, transportation, infrastructure, and beverage sectors, with interests and partners in Europe, Russia, Asia, and North America.
Since the announcement of US and Canadian sanctions, Timchenko and Volga Group-controlled firms have announced new projects in Asia, Europe, and Syria with reported financing from Chinese and Russian banks, including institutions sanctioned by the US on July 16. Financial institutions engaged in global business should consider the implications for AML and sanctions risk management.
TIMCHENKO’S POST-SANCTION BUSINESS VENTURES IN CHINA
In late April 2014, President Putin appointed Gennady Timchenko to lead the Russia-China Business Council (RCBC), a body created in 2004 to expand partnerships between the two countries. Timchenko told reporters after President Putin’s RCBC announcement: “You know what Putin said? He introduced me by saying Mr. Timchenko is the head of our business council. In other words – it is my words here – he is our main man for China.”
As head of RCBC, Timchenko is advancing Volga Group interests in China.
- In late May 2014, Volga Group announced a joint-venture with the state-owned China Harbour Engineering Co (CHEC) to expand coal production capacities in Russia’s far east. CHEC manages public infrastructure projects globally, including in the Middle East, United States, Caribbean, Central America, South Asia, and West Africa.
The joint-venture will grant CHEC minority stakes in two Volga subsidiaries: Kolmar, a coal mining company that has not been sanctioned; and Sakhatrans, a Volga Group-controlled transportation company that is constructing a terminal for coal and iron ore shipments in Russia’s Far East. Sakhatrans is sanctioned by the US and Canada.
Volga Group is also involved in an Arctic gas project with international energy majors through a 23 percent stake in publicly-traded Novatek. On July 16, the US applied sanctions that restrict new financing for Novatek.
The Yamal LNG onshore natural gas project in the Russian Arctic is a joint venture formalized in early 2014 between Novatek (60%) and two European and Asian energy conglomerates. Novatek is Russia’s second largest natural gas producer. Novatek sells and distributes hydrocarbon products in southeast Asia, China, Brazil, and Europe.
- In May 2014, Timchenko told reporters during the St. Petersburg International Economic Forum that Chinese banks were willing to finance up to $20 billion of the $27 billion project cost of the Yamal LNG project. Timchenko also stated that Volga Group would invest in China’s LNG storage and pipeline infrastructure.
- On May 20, 2014, a Yamal LNG press release announced that a Chinese development bank as well as Moscow-based Vnesheconombank (VEB) and Gazprombank signed a memorandum agreement to complete project financing for Yamal LNG in the fourth quarter 2014. On July 16, the US applied sanctions that restrict new financing for VEB and Gazprombank.
VOLGA GROUP COMPANY PURSUES SOUTH STREAM PIPELINE
Timchenko’s Volga Group owns 63% of Stroytransgaz Group, which in turn owns a 50% stake in oil and gas construction company CJSC Stroytransgaz (A.K.A. ZAO Stroytransgaz). Stroytransgaz Group is sanctioned by the US and Canada, whereas CJSC Stroytransgaz is not sanctioned.
- CJSC Stroytransgaz projects include all of Russia’s strategic pipeline projects, according to the company’s website.
- CJSC Stroytransgaz relies on a variety of North American and European equipment manufacturers to support its operations, according to its website.
- CJSC Stroytransgaz currently holds contracts with Stroygazmontazh, the energy construction firm controlled by Putin inner circle member Arkady Rotenberg. Stroygazmontazh and Arkady Rotenberg are sanctioned by the US and Canada.
In May 2014, CJSC Stroytransgaz won a $4.8 billion tender to construct the Bulgarian section of the $38 billion South Stream gas pipeline. The South Stream pipeline aims to connect Russian gas supplies with Eastern Europe while bypassing Ukraine. The tender was issued by South Stream Bulgaria, a 50/50 joint-venture between Gazprom and Bulgarian Energy Holding.
- In August 2013, CJSC Stroytransgaz opened offices in Bulgaria, Serbia, and Slovenia – all countries involved in the South Stream project.
- As of late 2013, French and Dutch financial institutions were coordinating financing for the South Stream project.
On June 8, Bulgarian Prime Minister Plamen Oresharshki announced that the government suspended construction of the South Stream pipeline at the request of EU officials who want to investigate the process for awarding South Stream contracts for the Bulgaria section. The main opposition to the Oresharski government has indicated it wants to cancel the CJSC Stroytransgaz contract and reopen the bidding process if elected. As of mid-July, the Oresharshki government planned to resign and schedule elections for autumn 2014.
VOLGA GROUP MINORITY-OWNED FIRM PURSUES BRIDGE CONNECTING RUSSIA TO CRIMEA
In April 2014, SK MOST announced its intention to bid for the construction of the Kerch Strait bridge. Currently in the planning phase, the Kerch Strait bridge would be the first overland route connecting Russian mainland and the Crimea peninsula across the Kerch Strait. With motor and rail capacity planned, the Kerch Strait Bridge will enhance cargo and petroleum transport capacity between the territories – further integrating the Russian and Crimean economies. SK MOST specializes in bridge and tunnel construction. SK MOST is not sanctioned, however, Stroytransgaz Group, which is sanctioned, owns 25% of SK MOST.
- SK MOST manages public infrastructure projects primarily in Russia, according to its website. The company handled construction of major rail and road projects for the 2014 Sochi Winter Olympics.
- SK MOST planned to bid for the Kerch Strait bridge project together with Mostrotest – a construction firm in which Arkady Rotenberg and his son Igor are significant minority investors. Arkady Rotenberg is sanctioned by the US government.
- As of mid-April 2014, oil imports from Russia to Crimea were routed via maritime transport to the US and EU sanctioned Feodosiya Enterprise oil terminal in Feodosiya, Crimea, due to the lack of a land route to Crimea.
- Gazprombank and another Russian financial institution have issued multi billion ruble credit facilities to SK MOST in recent years.
STROYTRANSGAZ AGREES TO IRRIGATION DEVELOPMENT PROJECT WITH SYRIAN GOVERNMENT
In late June, the Syrian state news agency reported that “Stroytransgaz” signed an agreement with the Syrian government’s General Commission on Water Resources to complete a $2 billion irrigation project in northeastern Syria.
The project was reportedly initiated at the directive of President Bashar al-Assad.