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‘Gnarled and stunted and wrong’ How a renowned film director sunk over $100 million in government loans on a bizarre box office flop

Source: Meduza

In the late 2000s, Andrey Konchalovsky released his most ambitious project yet: a large-scale movie version of The Nutcracker, with Hollywood actors and cutting edge graphics. He got funding for the film from Vnesheconombank (VEB), Russia’s state development corporation — but the film was a box office bust, leaving him unable to pay back the money. A new investigation by Transparency International Russia found that Konchalovsky owes VEB almost $130 million — roughly equivalent to Russia’s entire state film production budget for 2021. Below, Meduza is publishing a translation of Transparency International Russia analyst Lizaveta Tsybulina’s report, which tells how the Nutcracker money ended up in Konchalovsky’s offshore account — and how VEB is trying to get it back.

A green light from the Culture Ministry

Ten years ago, Russia’s Cultural Ministry decided it should be in charge of determining the topics of the films that receive funding from the state budget. Initially, then-Culture Minister Vladimir Medinsky vowed that “socially significant” films and “educational products” would get top priority. But a year later, when the first list of selected films was released, it was apparent that the government was more interested in patriotic films than social ones. The chosen films’ themes included “the brotherhood of nations,” “the achievements of Soviet cosmonauts,” and “Russia’s military glory.”

Since then, the Russian government has sponsored yearly films dedicated to military achievements, “traditional family values,” and “combatting attempts to falsify history.” In 2022, the priority will be given to movies that depict Russia as a “modern, stable, and secure state that provides opportunities for development and self-actualization.”

“Why should the state suddenly dedicate money to artistic freedom?” said director Andrey Konchalovsky in 2017. “All great works were commissioned, you know. Leonardo da Vinci, Michelangelo, and Raphael only did commission work. They were explicitly told what to do. Moreover, Michelangelo’s Sistine Chapel was done under the watchful eye of the Inquisition. And it turned out okay, wouldn’t you say?”

Naturally, Konchalovsky became one of the directors who regularly receives funding from the Russian Culture Ministry. His companies started receiving money from the state budget like clockwork — despite their films deviating frequently from the pro-government agenda. Still, Konchalovsky himself did support both the annexation of Crimea, and Vladimir Putin. “The longer he’s in power, the better it is for Russia,” he has said.

Since 2015, Konchalovsky has received almost 300 million rubles (over $4.5 million) for his films. Most of them have been successful. For example, Paradise, a drama about the Second World War that stars Konchalovsky’s wife, Yulia Vysotskaya, won the Silver Lion award for Best Director at the Venice International Film Festival. The film cost the Russian government about 30 million rubles (over $450,000).

In 2018, the Andrey Konchalovsky Production Center received a non-refundable grant of 70 million rubles (over $1 million) for the film Dear Comrades. The Culture Ministry’s support was unexpected; the film depicts the 1962 shooting of peaceful demonstrators in the Russian city of Novocherkassk. Two years later, the government allocated 10 million more rubles to the film to cover “distribution expenses.” The film made the Oscar shortlist and won the Special Jury Prize at the Venice Film Festival.

Konchalovsky made lower-profile films as well — for example, in 2015, the Andrey Konchalovsky Film Company received 30 million rubles (about $461,000) for the film Genres. In 2017, the Culture Ministry provided another 30 million ruble for the sequel. Konchalovsky’s website, however, mentions only one Genres film, which it refers to as a collection of short film by seven early-career directors “reflecting on the theme of what happens to a person when he’s left alone with himself.” At the same time, one of the film’s credited screenwriters and directors is Konchalovsky’s daughter, Natalia Mikhalkova-Konchalovskaya. The film did poorly at the box office, only bringing in about only 60 thousand rubles.

In most cases, however, the Culture Ministry’s contributions didn’t cover even half of the costs of Konchalovsky’s films. The film Sin, for example, cost almost 800 million rubles ($12.3 million dollars); Paradise cost around 288 million rubles ($4.4 million); and Dear Comrades cost around 150 million rubles ($2.3 million).

These films were partially sponsored by the oligarch Alisher Usmanov’s charity foundation Art, Science, and Sport. “We worked with Alisher Usmanov. He and I are united by the fact that we’re both curious people. And what we’re curious about isn’t whether people will like the film or not — it’s whether we can remind the viewer once again that he should think about the meaning of life,” said Konchalovsky.

Konchalovsky admitted not making back the money Usmanov spent. “I told him he wouldn’t get his money back. He froze for a second, and then answered: ‘Damn you.’” On the film Sin, however, Usmanov was named general producer, and his name appeared on movie posters alongside Konchalovsky’s.

A $90 million fever dream

According to Konchalovsky, he first had the idea to stage a film version of one of Tchaikovsky’s ballets 40 years ago — when the then-32-year-old, his father, and the director Andrey Tarkovsky wrote their first speculative screenplay, which was unsuccessful. Konchalovsky returned to the idea several times, ultimately coming up with a more specific vision: a musical based on the Hoffman short story The Nutcracker and the Mouse King, with Tchaikovsky’s music as the score.

Vienna was chosen as the filming location. The plan for depicting the rat king was to “ratify” the human actors, transforming them into humanoid rats. Despite the obvious allusions to totalitarianism and dictatorship (the rats in the film wear uniforms strongly reminiscent of Nazi uniforms), Konchalovsky himself described the film as a movie about “the loneliness a child experiences when he’s not listened to at home.”

“Our goal was to create a world in which fantasy was intertwined with reality, the way children experience the world. Toys spark their imagination, and we, like children, with incredible technology at our disposal, decided to play with these toys and give our fantasy absolute freedom,” he said.

While the movie was being shot, according to the director, “the most expensive computer graphics” were used. The person in charge of them was John Stevenson, whose previous special effects work includes films like 101 Dalmatians and Babe. “I thought, how am I supposed to cut costs? Is my monkey not supposed to have a real facial expression? Should we give it a rubble face, like in the old Planet of the Apes? I started looking for money. And now when you look at the chimpanzee, you don’t even understand how such a thing could be possible,” said Konchalovsky.

Konchalovsky stressed that some of “the best Hollywood specialists” worked on The Nutcracker: the executive producer was Moritz Borman (The Terminator) and the librettist was Tim Rice (The Lion King, Jesus Christ Superstar). The main character was played by Elle Fanning, and the film was made in English; its U.S. premiere was even a month before the Russian one.

“Well, when you have money, you can put together a team. It’s not so hard if you can pay these people,” Konchalovsky said in an interview with Afisha.

The relatively modest sums usually offered by the government wouldn’t have been enough to cover a project of this magnitude. Still, The Nutcracker was ultimately made with public money. This time, however, rather than going through the Culture Ministry, Konchalovsky found another route.

Initially, he was reluctant to reveal who was responsible for funding his film and its “incredible technology.” In an interview with Rossiyskaya Gazeta, Konchalovsky said, “American money, American actors, our composer, and our director. Filmed in English.”

Later, however, when the film’s trailer started playing in theaters, it began with the words “Made with the support of Vnesheconombank [VEB],” while mentioning nothing about foreign funding.

Two weeks after the film’s foreign release, in December 2010, Vedomosti, citing the bank’s press service, reported that VEB hadn’t just supported the film — it was its main sponsor, and had been since production began in 2007. Andrey Konchalovsky Production Center General Director Yevgeny Stepanov confirmed it: The Nutcracker was funded primarily by VEB (with a budget of $90 million).

The article also mentioned gratuitous sponsorship, though it didn’t provide any specific numbers. Several days later, Kommersant learned that it wasn’t a sponsorship after all; VEB had given Konchalovsky’s company a $50 million loan. The deal’s conditions, however, remained secret.

Another $30 million came from private investors. According to Kommersant, these investors were Konchalovsky himself and British producer Paul Lowin, who worked on Konchalovsky’s 2003 film The Lion in Winter. Konchalovsky admitted that he initially intended to make The Nutcracker on VEB money alone, but “God knows that’s not possible.”

VEB’s main function is to fund investment projects, and film production has never been one of the five key areas permitted for investment listed on the bank’s website. The only exceptions are projects approved by the bank’s supervisory council, which is headed by Vladimir Putin. Konchalovsky’s project likely didn’t pose a problem for them. What’s more, according to Andrey Konchalovsky Production Center General Director Yevgeny Stepanov, VEB later allocated even more money to The Nutcracker — $10.9 million — to convert the film to 3D.

Konchalovsky’s Nutcracker ultimately became the most expensive movie in the history of the Russian film industry. Nikita Mikhalkov’s Burnt by the Sun, for example, which was also funded by VEB, cost between 40 and 55 million dollars. Fedor Bondarchuk’s film Dark Planet cost $36.5 million, and the same director’s Stalingrad cost $30 million.

According to Kommersant, Konchalovsky was planning on using The Nutcracker’s earnings to cover its costs. Despite its record-setting budget, however, the film was a bust. In the U.S., it only made $196,000.

In Konchalovsky’s opinion, the reason for the failure in the American market was underinvestment in advertising — they only spent $5 million — and negative reviews from critics: “Viewers didn’t go, because the reviews of the film were very negative. I believe critics just completely misunderstood it. Essentially, I made a fun fairy tale, and critics, for some reason, decided it was a terribly dreary film.”

“This semi-delirious, grand-scale extravaganza from the restless Russian filmmaker Andrei Konchalovsky… is spiked with imagery from Holocaust nightmares and drug trips,” wrote Entertainment Weekly. “A Nutcracker with a Nazi allegory… is something gnarled and stunted and wrong, something that should never have been allowed to see the light of day,” read Slate’s review.

“[The director] displays undeniable ambition with this attempt to reinvent a beloved classic. But that will be of small comfort to its younger audience members’ battered, if not bored, psyches,” wrote Hollywood Reporter.

After the film’s failure in the U.S., Konchalovsky laid his hopes on Europe, Asia, and Russia, but The Nutcracker ultimately still failed to pay for itself, making just a little over $15 million worldwide, $13.7 million of which came from Russia.

IMDb gave The Nutcracker a 4.2 out of 10, and on the Russian film database Kinopoisk, it got just 2.9 out of 10. The film was even nominated for a Golden Raspberry award in the “Worst Misuse of 3D” category. It failed to win even that.

Disappearing act

Transparency International Russia has learned that in December 2020, VEB filed a lawsuit for the unpaid load in the Grand Court of the Cayman Islands.

According to documents from the territory’s judicial decisions registry, Andrey Konchalovsky approached VEB with his idea to make The Nutcracker in approximately 2006. A year later, Konchalovsky opened a company called Nutcracker Holdings Limited in the Cayman Islands for the specific purpose of financing the film’s production. Two other companies were listed as the film’s producers: Noisette Film Productions, which Konchalovsky opened in England in 2006, and a Hungarian company called HCC Media Group Limited. A company called Creativity Limited, which was involved in the scriptwriting process, was also registered in on offshore jurisdiction: the British Virgin Islands. According to VEB, this company may also have belonged to Konchalovsky.

In the middle of May 2007, Nutcracker Holdings Limited applied for a film production loan. By early June, VEB and Nutcracker Holdings Limited had signed a funding agreement under which the corporation would be required to provide $50 million at a fixed interest rate of 6.5 percent per annum. According to the contract, Nutcracker was supposed to repay the money in full by May 1, 2010.

As part of the lending terms, VEB required that two of its own employees be put in control of the company: Anatoly Ballo and Oleg Nikanov. Anatoly Ballo, who’s now the deputy director of VEB, has been the suspect of two criminal cases in his life. In 2012, he was charged with large-scale fraud: investigators suspected him of stealing $14 million and keeping it in offshore accounts at Swiss banks. Three years later, however, the proceedings were discontinued “due to a lack of evidence,” according to his lawyer.

Then, in 2020, Ballo was accused of large-scale embezzlement. On February 21, Moscow's Meshchansky Court terminated court proceedings when the statute of limitations expired. Ballo left his position as VEB's deputy director in 2016; where he’s worked since then is unclear.

Oleg Nikanov also left his position as first deputy director of the bank Globex (a subsidiary of VEB) in 2016. Where he’s worked since then is also unclear.

Another condition put in the contract by VEB was that all of the revenue from The Nutcracker’s distribution be put in a special account, according to court documents; the log would then be used to repay the loan. Additionally, VEB would own the rights to the film, while Nutcracker Holdings Limited and the other companies involved in the film’s creation and production would be given revocable distribution licenses.

In the summer of 2009, VEB filed the first lawsuit against Nutcracker Holdings Limited for payment of the interest on the loan, but Konchalovsky asked that the payment date be postponed. He argued that The Nutcracker’s release date was being postponed to avoid competition with James Cameron’s Avatar, which later became the highest-grossing film in history. VEB agreed, and the loan payment date was extended until April 28, 2011.

But the extension didn’t help. When it became clear that The Nutcracker had been a box office failure, Andrey Konchalovsky began a series of lengthy negotiations. From mid-2011 to mid-2014, Nutcracker Holdings Limited held debt restructuring talks with VEB — but they ultimately didn’t go anywhere. In 2015, Vedomosti, citing its own sources, reported that “certain agreements had been reached” between Konchalovsky and VEB regarding the debt, but that they didn’t appear to be working out.

On May 10, 2016, VEB sent Nutcracker Holdings Limited an official claim for almost $92 million and over 500 thousand euros — an amount that included the accumulated interest, late fees, and other expenses incurred by the company. Meanwhile, the debt under the loan agreement continued to increase as the accrued interest grew.

The corporation didn’t receive any response from the Cayman Island-based company. A week after the claims were filed, however, VEB employees met with Konchalovsky personally, according to documents from the lawsuit, but nothing came out of the meeting.

In addition, it became clear that not a single penny from The Nutcracker’s ticket sales in Russia — more than 90% of all box office revenue from showings of the film worldwide — made it to the special account. For the entire term of the loan, VEB only received $1.4 million from the account (which may have come from showings in the U.S.). VEB also received the rights to the film, which were estimated to be worth about $1 million. At the end of 2020, Nutcracker Holdings Limited owed VEB $127.8 million (including the principal, the interest, and legal costs). By then, though, the company had been removed from the Cayman Islands business registry for failing to pay the annual fees.

VEB filed an appeal to a court in the Cayman Islands to try to get Nutcracker Holdings Limited put back on the registry and then to have official liquidators appointed to get some of the money returned. For example, they thought it might be possible to establish connections between the company and other companies that took part in the film’s production, and to force those companies to sell their assets.

Representatives of Andrey Konchalovsky and his companies, as well as VEB, have not responded to requests for comment. It’s unclear what stage the legal proceedings are currently in.