France's 2011 deal to sell to the Russian navy four - and up to 20 in all - 22,000-tonne Mistral-class amphibious assault vessels, called “projection and command” ships, or BPCs, built to carry helicopters, tanks and troops, following Russia’s 2008 invasion of Georgia was, as some in the French military recognised, a high-risk contract.
On the Russian side, the key negotiator in the 1.5-billion-euro deal was oligarch and, at the time, shipyard owner Sergei Pugachev, once a Kremlin insider and personally close to Russian President Vladimir Putin.
In this second and final extract from a lengthy interview with Mediapart this month, he confirms that the decision to purchase the Mistral warships was part of Russia’s new strategy, at the time already adopted, to deploy troops and equipment in neighbouring countries, while also benefitting from the transfer of sensitive technology.
It would be an ill-fated project on several fronts. For Pugachev, who now lives in exile in Nice, in southern France, it led to his ship-building business in Saint Petersburg being taken over by the state, after which he was expropriated.
Pugachev’s shipyards were the only ones in Russia capable of building the Mistral warships, where, after delivery of the first two from France, Moscow planned to build at least two more.
The contract, Pugachev told Mediapart, was signed to a backdrop of kickbacks in a well-oiled system that benefitted Putin and one of his principal allies, Sergei Chemezov. Once Putin’s superior officer in the KGB when the pair were stationed in the former East Germany, in Dresden, Chemezov was head of the state’s licensing agency for arms imports and exports, Rosoboronexport.
He became, and still is, the CEO of Rostec, the Russian state’s defence conglomerate. He has allegedly regularly pocketed commissions from arms deals, which Pugachev says were paid into offshore accounts to the benefit of both him and Putin.
“No-one else in Russia had the right to buy or sell [weapons] without going through Chemezov and paying him an eight percent commission,” Pugachev told Mediapart, adding: Officially, the money was sent to Rosoboronexport, but it went through offshore companies, I don’t know where.”
Enlargement : Illustration 1
Chemezov, to whom Nicolas Sarkozy, when French president, personally bestowed the Légion d’honneur in March 2010, negotiated commissions from the Mistral deal, according to Pugachev.
Contacted by Mediapart via Rostec, Chemezov issued a firm denial of the accusations. “These declarations are the emanation of a compromised conscience,” the statement read. “It is a ‘fake’, a deliberate lie which is made within the framework of a campaign to discredit Russia.”
Meanwhile, the Mistral contract, inked by then French president Nicolas Sarkozy in 2011, was finally cancelled by Sarkozy’s successor, François Hollande, following Russia’s invasion of Crimea in 2014. The warships were subsequently sold on to Egypt, despite the establishment, following a military coup in the country in 2013, of a dictatorial regime under President Abdel Fattah al-Sisi. In November 2014, Sarkozy argued that France should “honour its word” and “deliver the Mistrals” to Russia.
Following here is the second extract from the lengthy interview Sergei Pugachev gave to Mediapart earlier this month, via video link, from his residence in Nice.
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Mediapart: You played a key role in the initial stages of the contract for the purchase by Russia from France of the Mistral warships, before Putin in person removed you from the process. How did the idea of buying these ships come about?
Sergei Pugachev: At the time, I owned the biggest shipyard complex in Russia. The ministry of defence organised meetings, in the presence of the fleet high command, to tell us that it needed landing boats capable of transporting lots of equipment and forces, to carry out, as Putin called it, ‘special operations’. The Russian fleet had practically not changed since the Soviet era. It was in an appalling state.
During the preparations for the war with Georgia [editor’s note, in 2008], the Russian military revised their doctrine. The principal enemy was no longer the United States, rather the former soviet republics. The ships that previously cruised in the Atlantic, in the northern seas, in the Mediterranean or elsewhere were no longer necessary.
They needed boats to patrol the three-mile zone, to watch over borders and to keep an eye on neighbours. In the case of an operation in the Baltic Sea or the Black Sea, they wanted to be able to land troops and equipment to carry out a land operation. In Ukraine, you can use transport by road, by rail, but in Georgia that was not possible. So it was necessary to be able to land tanks, combat vehicles and men.
Russia did not have this type of ship. So they turned to me. They asked me if I could build them, and how many. I needed to carry out a study, to see what was being done elsewhere, who were the leaders. From that it emerged that there were the French boats, the Mistral, and the [South] Koreans. To take a look on the American side was excluded.
I had visited the French shipyards with a Russian delegation, and the military gave their agreement in 2009. The formulation of the agreement I signed was the following: two BPCs [for ‘projection and command’ boats] would be built in France, for a value of 1.5 billion [euros]. The assembling would be finished in Russia, and France would grant its licence to build, in Russia, a total of 20. For my company, it was a 15-billion-euro contract, with a profitability for me of around 20 percent. That was the deal.
Enlargement : Illustration 2
Mediapart: So you were in the middle of negotiations when Putin invited himself into the deal?
S.P.: Yes. Firstly, he went to the site in person, in Saint Petersburg, to lead a conference about shipbuilding, in my plant, the OPK [for ‘United Industrial Corporation’], without inviting me. ‘Plant’ is a manner of speaking, because we’re talking about a gigantic site, with a surface area equivalent to half of Saint Petersburg, with railways, tunnels, an electric power plant. Putin was prime minister. My chief executive informed me, asked if I’m coming. I explained to him that I had not been invited.
During this gathering, Putin asked my director why we had no cooperation with the state shipyards – which existed only on paper; He explained that that was not right, and proposed, right in the middle of the conference, to appoint Igor Sechin, the first deputy prime minister, to the state shipyards’ management board. The same Sechin was also present.
I saw Putin on his return to Moscow. He said to me: ‘It’s super, all these billions. But careful, all these billions, you receive them from the state.’ It came across as a quite strange signal. His message was, ‘Me, Putin, I pay you for these ships’.
He told me, ‘I have placed Sechin, it’s necessary to work with him’, and insisted on the theme of ‘it’s necessary to share’. [Putin said,] ‘You can’t be the only one, the state yards must be developed. Here, you have the monopoly, allow the competition a bit’. After that, Sechin wrote to my director to ask him in all urgency our order books, the amounts and the delivery times, to present them to Putin.
Mediapart: Was it the first time that Putin showed an interest in your business activities?
S.P.: I had begun to build this shipyard site in the 1990s, under [former Russian president, Boris] Yeltsin, when Putin was not yet in power. Putin knew that the principal revenue sources for Russia were oil and gas, but it was not until close to 2010 that he had understood that shipbuilding was an enormous, gigantic matter at stake for exploiting the Arctic plateau. And that it was not only about colossal sums, something that has always interested him, but also a very serious lever of influence over Gazprom, Rosneft, Loukoil and the like, all of who were my clients as well as Western companies, and not forgetting obviously the armed forces. I was at the time the only exporter of surface military vessels to India, China and other countries.
So, firstly we talk about billions, and then about a sphere which, according to Putin, should be a prerogative for the state.
It was quite a captive market. When I created OPK Naval, 75 percent of the Russian fleet needed to be renewed. It was a 100-billion-dollar market at the very least. We had no choice. We couldn’t build warships in Germany or in the United States, that’s obvious.
Putin was present each time the ships were launched, as president or as prime minister. But he often showed himself to be displeased. I built the biggest nuclear-powered icebreaker, for the ‘50th anniversary of the Victory’ [in the 1941-45 war against Germany]. We produced a series of icebreakers, each one cost between 1.5 and 2 billion dollars. The first was the biggest in the world, everybody was talking only of that, and he wasn’t happy. I asked him, ‘But why aren’t you happy?’. He replied, ‘But what’s up with you with all your icebreakers?’ It was strange.
Mediapart: At the time of the negotiations to purchase the Mistral ships, he proposed to buy up your company?
S.P.: Yes. At the end of 2009, Putin called me and said, ‘You can come round to drink a tea, have a bite to eat’. It was at his dacha, at Novo-Ogaryovo [official residence]. He tells me: ‘Listen, I’ve been thinking. You have a lot of things, property, shipyards, mines. It’s too much, you don’t have the time. Why do you bother yourself with the shipyards? They are colossal sums these warships. It should belong to the state. We’re ready to buy you out. What do you think?’
‘Listen, why not? The question is how much. On the principle, why not, everything can be sold, except for conscience and honour. I’m listening.’
Normally, with a buyout of the sort, there is firstly a request for an estimation, over three months. Putin asks me, ‘How much do you want?’. I reply, ‘Volodia [a pet name for Vladimir], what do I know? I need to have a precise evaluation. A few months are needed for Ernst & Young and the like to do their work. I can’t give you a figure.’
He insists, ‘How much do you want for it?’ I tell him, ‘That’s not the question, leave me at least a month to give you a precise evaluation of the assets.”
‘OK, one month, but you, how much do you think it’s worth? You must have an idea.’ I answer, ‘Around 10 billion dollars’. He tells me, ‘With the 2008 crisis, inflation, and all that, ten is a lot’.
‘You ask me, I answer you, ten billion minimum.’ He says to me, ‘We’ll agree to 7.5, is that alright with you?’ I tell him, ‘I don’t care, I just want it to be done by the book. It might be that we’re underneath [the true value]’.
‘Stop messing me about. It’s best if you and me agree now rather than that you find yourself in conflict with Sechin.’ He said that to me. It was obviously a threat. I understood, and so I tell him, ‘7.5, that’ll be fine.’
He says to me, ‘You see, it’s not so difficult to reach agreement’, and then he called [Alexei Leonidovich] Kudrin, the minister of finance. He says to him, ‘Alexei Leonidovich, I’m with Sergei Viktorovich [Pugachev], he wants to sell his shipyards. The money must be found rapidly. We have agreed to 7.5 billion dollars’.
Kudrin explained to him that it is money taken from the budget, that we were at the end of the year, that it had to come from the next budget, so not before September 2010. Putin pressed him. But Kudrin warned him that he would have difficulty finding 7.5 billion. He could perhaps find 5, at most. Putin said, ‘OK for 5 straight away and as for the rest, we’ll see later’. He asked me if that was alright with me. I told him, ‘OK’.
We finish dinner, we talk about other things. The next day I see Kudrin who says to me: ‘Has the boss lost his mind or what? Where do you want me to find the money?’
All that would last some while. The conflicts and intrigues multiplied, the buyout gets bogged down and finishes in an expropriation raid.
Enlargement : Illustration 3
Mediapart: Another strongman, and close Putin ally, Sergei Chemezov, came into the story, on the sidelines of the negotiations for the Mistral warships. In March 2010 in Paris, he was awarded the Légion d’honneur by then French president Nicolas Sarkozy. What role did Sergei Chemezov have in the Mistral contract?
S.P.: In Russia, there is a monopoly concerning weapons imports and exports. It is Chemezov who had the monopoly, through the Rosvooruzhenie agency [Rosoboronexport, part of the Rostec state-owned defence group whose CEO is Chemezov] which he headed. So, all the negotiations held in France, with the president, the minister of defence, the navy chiefs of staff – all these negotiations that I personally led – were officially overseen by Rosoboronexport.
In the documents, Rosoboronexport appears with the signature of Chemezov. No-one else in Russia had the right to buy or sell without going through Chemezov, and paying him an eight percent commission.
Mediapart: Was he personally paid a commission?
S.P.: In fact, yes, personally, because it was via offshore companies. Officially, the money was sent to Rosoboronexport, but it went through offshore companies, I don’t know where.
It was like that for all that was bought and sold; for example, when my company sold destroyers to the Chinese – two destroyers, worth 1.5 billion dollars – or when we sold to the Indians – four destroyers, more than 3 billion dollars. It wasn’t me who paid this commission, but the buyers, it was them who paid the eight percent. Naturally, Rosoboronexport is not the real beneficiary, but rather Putin and Chemezov.
For the buyer it makes no difference, it’s in the price that they accepted to pay. If the Russians asked the Chinese for 2 billion, offshore, that would make no difference to them. In the case of India, there was reciprocal corruption, return commissions.
Mediapart: And in France? Did Chemezov negotiate in person?
S.P.: No, no, no. It’s us who led all the negotiations, the price, the construction, the licence. It’s our design and technical office, my engineers, a whole site of 17,000 people. What do you want Chemezov to do in the negotiations? He didn’t even know what was being talked about.
Mediapart: So he did nothing, you led negotiations and he took his eight percent?
S.P.: Yes. I had no other choice. I don’t have the right to buy or sell without going through him. It’s a state prerogative. Chemezov is the state. It’s like the rights on vodka. You make it, you sell it and the state takes ten percent. It’s the same thing.
He comes along just once. It’s the same thing every time, with every contract that we did involving him, in France or elsewhere. He or his deputy comes. They have a good time, they drink, they eat, they are paid eight percent offshore and they are all very happy. One week later, they leave for home.
Mediapart: But in this precise case? Who came to France for the party while awaiting the eight percent?
S.P.: Chemezov and [Dmitry] Medvedev. I was also there. It was at the Élysée [Palace, the French presidential office], a formal meeting with the president [Nicolas Sarkozy] who kissed us, thanked us, for all the money which landed on him – Russia had paid an advance of 2 billion dollars. Super!
Mediapart: The commission of eight percent was a regular thing?
S.P.: It’s the standard minimum, sometimes it’s more. Eight percent is what Chemezov takes, but there can be other people. Chemezov can say, ‘The deal was prepared for us by friends of the French president’, for example. In which case, he asks for two percent for the ‘friends of the president’, also offshore. And in fact one never knows if these ‘friends’ exist or not. Perhaps not. But it’s yet more money that departs. And which maybe goes back to Chemezov, I don’t know.
Mediapart: This contract was quite specific, because it was Russia who was the purchaser.
S.P.: Yes, when I sell, I know that the buyers – the Chinese, the Indians – hand 8% to Chemezov. In this case [France’s sale of the Mistral warships] it’s different: we are buying the ‘shells’ of the boats and we finish them ourselves, we arm them. In short, we finish the work. And that’s just for the first two boats. All the others were to be built totally in our site. There was an option to do the next two boats half and half, but the largest part of the total sum was the licence. We paid the licence, the royalties.
Mediapart: So, in this case, who paid Chemezov?
S.P.: If somebody paid him it was the French. It’s possible that he told the French, ‘If you want us to buy them…’ – and of course France wanted to sell them – ‘…then, as an intermediary between the shipyard…’ – me – ‘and France, I want this much’.
Mediapart: Do you know whether in this case Chemezov demanded money from someone?
S.P.: Yes. He demanded. Not proposed. Demanded.
Mediapart: Can you be more precise?
S.P.: No, because at the end of the day, it’s a confidential contract between the two countries, where the percentages for ‘services’ are settled. It’s normal practice. France exports to Russia, and Chemezov is supposed to do that for free? Of course not. If France wants to sell, it must pay the work by Rosoboronexport which puts its stamp on the contract, which makes it legal. And that needs to be paid for.
I remember having heard people complain about the difficulty in these negotiations, and explain that the French were tough to do business with, contrary to the Indians.
Mediapart: Who complained?
S.P.: Chemezov. It’s him who I spoke with. I know him well. We worked a lot together. For that, he’s quite unwise. He didn’t hide things.
Mediapart: Do you know the exact sum of the commissions paid?
S.P.: No. This confidential contract, which I never saw, is signed between Rosoboronexport and the country that buys or sells. In this case, it was perhaps not eight percent but two percent, but I don’t know. It’s the same everywhere, the state takes a commission. When Dassault sells its Mirage [fighter jets], the French arms sales agency takes a commission which goes into the state budget. The difference is that in our country, it goes to Putin and Chemezov via their offshore accounts.
Mediapart: Should one conclude that your project was dismantled in favour of a deal that was more profitable for Chemezov?
S.P.: Absolutely, at one hundred percent. Don’t forget that Chemezov is a close friend of Putin, he manages Putin’s money. He was his [KGB] boss in the GDR [the former East Germany], when Putin was in Dresden.
Mediapart: Putin launched an international tender for the ships in July 2010, and six months later he retained the French offer in which the construction of the vessels would be managed by a consortium made up of the STX shipyards in France and the Russian shipyards OSK, which had taken over your ship-building business. You were accused by the Russian authorities of bankruptcy, and you received nothing from the sale of your business as promised by Putin.
S.P.: My business was confiscated for several reasons, and the principal one was money. When you have an order book of 60 billion, plus a monopoly which gives you a position of influence over the oil and gas sector, all of this story translates into money. A lot of money, commissions and potential misappropriations during the production process – for example, it suffices to artificially raise the price per tonne of iron, to raise the costs and pocket the difference.
Mediapart: Former French interior minister Claude Guéant told a judicial investigation in France that you gave him a bar of gold, and that he had recently sold it. At the time of the Mistral negotiations, he was secretary general of the Élysée Palace. Do you remember giving him that present?
S.P.: Absolutely not. Why would I have given him a present? I didn’t even see him. These bars are part of the standard package of official presents for civil servants: caviar, matryoshka, scarves and medals from the central bank. It is possible that when Medvedev came to see Sarkozy that the delegation distributed some. It could come from Chemezov or a deputy prime minister. It’s very symbolic but I have nothing to with that.
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- This interview was originally conducted in Russian and translated into French. The French version can be found here.
English version, based on the translation into French, by Graham Tearse.