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Konstantin Lastovich, a Russian businessman from Rostov-on-Don, at his apple orchard near South Ossetia's boundary with Georgia, July 2018
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The independent republic where everything depends on Moscow How a Kremlin lifeline aided by separatist Ukraine is developing South Ossetia

Источник: Meduza
Konstantin Lastovich, a Russian businessman from Rostov-on-Don, at his apple orchard near South Ossetia's boundary with Georgia, July 2018
Konstantin Lastovich, a Russian businessman from Rostov-on-Don, at his apple orchard near South Ossetia's boundary with Georgia, July 2018
Ilya Zhegulov / Meduza

After the war with Georgia in 2008, Russia became the first of five UN member states to recognize the independence of South Ossetia, effectively taking the breakaway republic under its wing. Ten years later, the territory’s governance and economy are largely controlled by Moscow, which has spent billions of rubles to keep South Ossetia afloat. Meduza special correspondent Ilya Zhegulev traveled to Tskhinvali to find out where that Russian money ended up, how the territory’s businessmen make ends meet, and how South Ossetia’s budget depends on the self-declared republics in eastern Ukraine.

“Why are you visiting South Ossetia?” a man in uniform asks me, without introducing himself. People entering this breakaway republic from Russia usually arrive by minibus from Vladikavkaz, the capital of neighboring North Ossetia. Most of those traveling with me are Ossetian women — I’m the only person the border guard has picked out from the crowd. After a short while, his colleague approaches me.

“Why did you decide to ask me in particular?” I ask.

“This is the standard procedure for all Muscovites,” the security official says. “We check them out in the database.”

“Do many of them come here?”

“Yeah, we get one or two Muscovites every week,” sighs the man. “Most people are locals or from neighboring regions.”

There are no further problems on our way across the border. The road onward leads through the Roki tunnel, whose entrance is painted in the colors of the Russian flag. The road inside looks more like one you’d find in Moscow or Europe. As the minibus winds its way through the mountains, we don’t encounter a single car.

In August 2008, the “Six-Day War” between Georgia and Russia ended with a truce mediated by European politicians, followed promptly by Moscow’s recognition of South Ossetia’s independence. According to Russian estimates, the conflict caused at least 18 billion rubles (more than $265 million) in damages to South Ossetia’s economy. Internal documents from the North Ossetian government seen by Meduza indicate that nearly six billion rubles ($88.4 million) from Russia’s federal coffers finds its way south every year. South Ossetia’s Economic Development Ministry confirms these figures.

Counted as investment per capita, this is twice as much as Russia’s federal government invests in Crimea, and ten times more than it invests in neighboring North Ossetia. Every year, more high-quality roads are built in South Ossetia. The de-facto capital of Tskhinvali now boasts a new university building and theater, new parks and boulevards, newly paved streets, and new homes built for those left homeless after the war. This is all thanks to finance assistance from Russia.

“They can’t just tell us, ‘Guys, you don’t need another children’s playground,’” South Ossetian President Anatoly Bibilov told Meduza. “We do need it. If [the Russians] see that things are under control — that there’s a clear explanation for the funds South Ossetia needs — then there’s no problem. Tomorrow, maybe Russia will tell us (or maybe the reverse: it will be us telling Russia) that we don’t need another three and a half billion [rubles], and that three will be enough for the next year.”

For some time now, the Kremlin has been trying to help South Ossetia boost its revenues by developing local businesses, attracting large investors, and forcing state companies to pay taxes. Recently, Moscow has apparently cooked up a new role for the breakaway republic, and it’s tied to territories even younger and less recognized than South Ossetia.

Water in the desert

Alan Alborov enters the negotiations room — a huge, echoing hall in the South Ossetian Chamber of Commerce and Industry, whose building resembles a Soviet-era Palace of Culture. He immediately invites me to his office (“it’s cozier there”). The room is cluttered with several unconnected computer monitors. Instead of office chairs, there’s one small sofa. “I only moved in recently. Haven’t had time to settle in yet,” explains Alborov, who was appointed head of the Chamber of Commerce in May 2013. A native of South Ossetia, Alborov used to live in Sochi and owned the company Granit Group, which supplied crushed stone for constructing a road to Krasnaya Polyana, just outside the city. Alborov’s old friend, Anatoly Bibilov, who became South Ossetia’s president in April 2017, recently invited him back home to develop the region’s economy. Alborov is eager to tell all about his first victories: “We reached agreements [on cooperation] with the Donetsk People’s Republic, with the Luhansk People’s Republic, with Crimea...” he says, counting them off one by one. “Now we’re going to Syria.”

Alan Alborov, the head of South Ossetia’s Chamber of Commerce, in his office, July 2018
Ilya Zhegulev / Meduza

Syria is the most recent UN member state to recognize the independence of South Ossetia. (Damascus made the decision in May 2018, following in the footsteps of Russia, Venezuela, Nicaragua, and Nauru.) The news still excites Alborov. “The entire Middle East suffers due to a lack of drinking water! And we’re swimming in it; there are hundreds of sources and springs here!” he exclaims. “We can export it to Crimea, and from there by sea to Syria. It’s a goldmine! Over there, a regular two-liter bottle costs three dollars. And the logistics? Well, just calculate it: It’ll cost about two rubles to bring each liter to port. That’s nothing. And transportation by sea is the cheapest in the world. What we don’t manage to produce ourselves, we’ll get from our brothers [in North Ossetia].”

Alborov avoids talking about the actual problems faced by South Ossetian businessmen; he prefers to make plans for the future, and considers his task to be “building bridges” between the authorities and business. “Just a week ago, the All-Russia Association of the Blind got in touch. They want help,” he says, by way of an example. “About 15 years ago, they lost their premises in Tskhinvali. Now Moscow suggests giving the place back to the blind. Then they’ll give them help restoring it, and set up a workshop. They’re saying they might open a glass-blowing workshop there, and also a canteen to feed 50 poor people. So the All Russia Association of the Blind is a serious organization, with money.”

Alborov says he was able to persuade all parties to allocate the premises to the association, but the group didn’t respond to Meduza’s questions about its relations with South Ossetia. In 2014, the association stated that cooperation with the republic would be possible only if it became part of the Russian Federation.

Not all local officials agree with Alborov. In late July, Bibilov became the first South Ossetian president to make an official visit to Syria. His entourage included South Ossetian Economic Development Minister Gennady Kokoyev, who doesn’t share Alborov’s optimism. “I didn’t see any particular problems with the water supply. In the desert, sure, but very few people live there,” Kokoyev told Meduza. The minister had his own priorities while in Syria: namely, developing what he calls a “touristic-recreational cluster.” Kokoyev is taciturn, however, when asked whether this means attracting war-weary Syrian tourists or bringing Ossetians to a war-torn Syria.

Gergiev lends a hand

Children standing on its footboards and clinging to its sides, a Ford Explorer rolls down an Ossetian country road. The kids squint into the summer sun, as the driver lights a cigarette. The man behind the wheel is a local businessman named Vladimir Bosikov, and the children are his relatives.

“Don’t mind them — they’re just playing special forces,” he explains. “They came along just to ride like that.” The car pulls up near a small shed with a water tank beside a raging mountain river. The kids run away to swim in the nearby lake, and Bosikov gets to work.

The water enters the tank from a source almost 1,000 feet upstream. Bosikov used to bottle it for sale in local stores, under the brand name Ossetian. The businessman abandoned his previous venture (the largest car repair service in Tskhinvali) to invest in drinking water. But the new undertaking didn’t take off like he’d hoped: his marketing and distribution budget was too small. “I spent 4,000 rubles [$60] a day, and earned around 1,500 [$22] from sales,” Bosikov explains. He was about to call it quits and close the business when he was invited to meet some “foreign investors.”

Vladimir Bosikov’s car drives toward his water source in South Ossetia, July 2018
Ilya Zhegulev / Meduza
A pipe running along a bridge, leading to Ossetian’s water source
Ilya Zhegulev / Meduza
Vladimir Bosikov at his water source
Ilya Zhegulev / Meduza

It turns out that the investors were from Russia, come to help Bosikov at the request of Valery Gergiev, the famous conductor of Ossetian origin. Gergiev had already brought the meat supplier “Evgodon” (which he partially owns) to South Ossetia, where it constructed a new 150-million-ruble ($2.2 million) sausage factory. He then reached out to Pavel Antov, the founder of “Vladimirsky Standart” (another meat company), to help him develop South Ossetia’s economy. “He was worried and asked if we could help,” Antov told Meduza. “We studied [the market] for a long time and started with what seemed like the simplest kind of business: water. But it was actually the most complicated.”

A Vladimir-based company now operates a new factory in Tskhinvali that bottles and distributes water. Bosikov, who owns the water source, gets a cut of the profits, and all he has to do is drive up every couple of days and check on the equipment. Bosikov is no longer losing money, but he says his partnership with the Russians hasn’t made him rich, either. Despite the factory’s large capacity, it still produces the same 100,000 bottles a month that Bosikov managed on his own. Antov says they need to put out at least 240,000 bottles to break even, and it’s only happened once.

Low sales continue to plague the business. Vladimirsky Standart markets Ossetian water at premium prices to consumers who don’t know the brand and prefer its competitors. “There’s water everywhere. Everyone flushes their toilets or runs the tap as much as they please, and everybody in the distribution chain gets a kickback,” Antov complains. “But we don’t do kickbacks.” Vladimirsky Standart’s founder admits that his company hoped for some “help” after launching its “patriotic” project with Ossetian, but it never materialized.

The bottling partnership was also too late to get any development assistance from the state. By the time they realized they could apply for government support, Bosikov says, South Ossetia’s Investment Agency had already stopped handing out money.

Moscow before Tskhinvali

Establishing an investment agency in South Ossetia was apparently Vladislav Surkov’s idea. According to Meduza’s source in Russia’s Presidential Administration, it all began in 2013, when Surkov (who previously supervised the Kremlin’s entire domestic policy) was appointed to serve as an adviser. In this new role, he was responsible for relations with South Ossetia, and he made it his mission to sort out the fledgling republic’s economy.

By this time, South Ossetia's political sphere was already under control. In 2011, voters unexpectedly rejected the presidential candidate supported by Moscow and elected the opposition politician Alla Dzhioyeva. The ruling Unity Party complained of violations and took the matter to South Ossetia’s Supreme Court, which promptly invalidated the election results. Later, Leonid Tibilov became president, a position he held until 2017, when he was replaced by Anatoly Bibilov — the same pro-Kremlin candidate who lost to Dzhioyeva six years earlier.

Following Dzhioyeva’s defeat, South Ossetia’s opposition ceased to be a problem, but money was still an issue. “Russia’s economic assistance simply dissolved. It was like standing in quicksand,” says Meduza’s Kremlin source, recalling the situation in the mid-2010s. “That help corrupted people, and it went nowhere,” they said, recalling how the authorities gave commodity loans to local farmers, and bought seedlings at a huge cost, but hired no one to plant them, and everything was lost. Similarly, they tried to develop animal husbandry and distribute cattle among farmers. Yet again, “they gave [farmers] cows, but not the funds to feed them.” As a result, the “entrepreneurs” slaughtered the cattle for meat, and never repaid their loans to the state.

“They tried to do something, but it didn’t amount to much because of the weakness of the state,” admits South Ossetia’s former economic development minister, Vilyam Dzagoyev, who is now a businessman and owns his own hotel. “We imported about 1,000 heads of Kalmyk cattle — the easiest breed to care for. In theory, [farmers] would come back five years later and give the state either the meat or its equivalent value in cash. Instead, they started filing bogus reports about the poor health of the cows, whose meat they actually brought to North Ossetia to sell.”

After the commodity-loan scheme failed, they cooked up another plan: unsecured loans at low interest rates, but only for thoroughly vetted businessmen. To this end, Russia’s Central Bank allocated about a billion rubles (roughly $15 million) to a conglomerate of Russian commercial banks, which in turn transferred the funds to the newly-established South Ossetian Investment Agency. This institution would then assess and select investment projects with the help of analysts from the banking sector.

Vladimir Bosikov, who’d previously tried to get banks to invest in his mineral-water business, now found an audience with a new project: selling South Ossetian lumber to Russia. The enterprise stalled, however, when he recalculated the startup costs and asked investors for additional funds. They refused.

Things went better for Bosikov’s friend, Albert Valiev, who agreed to meet with Meduza at “Vincenzo,” his fancy three-story Italian restaurant in the center of Tskhinvali, where the service rivals what you’d find in Moscow. Vincenzo sports expensive furniture, friendly waiters, and a lounge surrounded by columns. At least one floor is always packed, and the establishment with its jumbo TV screen on the summer veranda was the city’s premier venue to watch the latest FIFA World Cup. The restaurant has become one of the major symbols of Tskhinvali’s new life at peacetime. For the time being, there’s nowhere else like it in town.

Albert Valiev in his restaurant, Vincenzo, in Tskhinvali, July 2018
Ilya Zhegulev / Meduza

When Georgian troops entered Tskhinvali in August 2008, Valiev burned down his previous business: a cafe built on credit. Later, he asked then President Eduard Kokoity to help resolve his debt problems. Valiev walked out of that meeting as the newly minted head of the Industry Ministry’s Entrepreneurial Development Department, but he didn’t last long as a state official. The way he tells it, he fought too hard for businessmen's rights. A few years later, however, when people from Moscow started looking for energetic entrepreneurs in South Ossetia, they remembered his name.

Valiev was already brimming with ideas about his future project, Vincenzo. Instead of a fast-food cafe, he wanted to give the republic its first Italian restaurant, expecting business not only from local clientele, but also from soldiers stationed at the Russian military base installed outside the city after the war. (Several local sources told Meduza that there are as many as 10,000 Russian soldiers in South Ossetia, which itself has a population of just more than 50,000 people. Officially, however, there are only 4,000 Russian soldiers in the area, plus an unspecified number of FSB border guards.)

Valiev first turned to the Mercada Group, which created the original Vincenzo restaurant chain. They weren’t interested in his project, but he eventually convinced them to share the chain’s name and some advice about how to run the business. All that remained was to raise the money, and that’s where the investment agency came in.

Valiev claims that bank representatives and people from the presidential administration preferred to resolve any problems with local businessmen directly, bypassing the bureaucrats, much to the annoyance of state officials. This situation later saved Valiev: at one point, he realized that he’d underestimated his project’s scale and would need additional investment to open his restaurant. In Tskhinvali, he completely failed to get through to the local government, but Moscow proved to be much easier to convince. Valiev says he spoke directly with Vladimir Avdeenko in the Putin administration. “[The Muscovites] didn’t want the [South Ossetian] government involved, except only nominally,” Valiev says. “They realized that the [local] government is incompetent.”

Spokespeople for the Russian Agriculture Ministry’s Science and Technology Policy Department, where Avdeenko now works, did not answer Meduza’s calls.

Valiev and Bosikov both say they were even invited to Russia to get acquainted with Oleg Govorun, who heads the Kremlin’s department for cooperation with Abkhazia, South Ossetia, and CIS member states. “[South Ossetian officials] started asking how local entrepreneurs were going to Moscow, when nobody in the government had even been invited,” Valiev recalls. “What could I tell them? I said Avdeenko apparently invited us.”

Tricky seed money

Vasiliev says he proposed more than 50 investment projects to Kremlin officials, but nearly all these ideas were mothballed when Avdeenko left the Putin administration in 2014. South Ossetia would be getting even bigger projects, however, designed mostly by people from outside the republic.

Konstantin Lastovich, a Russian businessman from Rostov-on-Don and the owner of several small construction firms, came to South Ossetia to work as a subcontractor. Before long, he was approached by the republic’s investment agency, which had offered him credit on good terms. The agency now proposed that he remain in South Ossetia and rent almost 125 acres of land outside Tskhinvali, right at the boundary line with Georgia. This plot of land, which was caught in the crossfire of the war, is now an apple orchard, and the future site of a sorting facility and a refrigeration warehouse. The agency promised Lastovich roughly 200 million rubles ($3 million). Of all the ventures supported by South Ossetia’s investment agency, his was the only project without any Ossetian founders.

Lastovich says this aspect of working in South Ossetia is fairly straightforward. In Abkhazia, he points out, outsiders have to work with locals, in order to protect their businesses. In South Ossetia, things are far simpler.

Konstantin Lastovich in his apple orchard, July 2018
Ilya Zhelgulev / Meduza

This is not to say, however, that Lastovich’s work in South Ossetia has been problem-free. He got his first tranche of funding to buy seedlings when it was already too late to plant trees, meaning that he lost nearly a year’s work. In the spring, a man from Serbia (where Lastovich acquired the seedlings) came to teach the local population about growing these trees properly. But he didn’t stay long; Lastovich says the local Ossetians didn’t like a foreigner teaching them to work according to new, unfamiliar rules.

“Planting [trees] is difficult work, and everything needs to be under strict control. If they’re not planted properly, you have to cut out the roots — and that costs crazy money. And down here, it’s a real collective farm. The workforce is 17,000 people, but only 2,500 of them aren’t in the public sector, and these guys are mostly drivers, security guards, and salespeople,” says Lastovich. “Nobody wants to work in the fields. They say, ‘We aren’t slaves and we won’t obey your commands.’”

Before long, Lastovich says, the locals were throwing stones and even knives at the Serbian instructor, who had to flee the republic. For further lessons, he resorted to Skype.

Despite these obstacles, Lastovich says he still sees advantages in doing business in South Ossetia. Back in Rostov, he says, “you either have to be a parliamentary deputy or a leading official” to get any support or investment from the government.

While South Ossetia offers opportunities to entrepreneurs without these political connections, the system isn’t always reliable. For example, Lastovich’s loan was supposed to be delivered in three installments, but the third payment never arrived. He says the agency’s coffers ran dry, and its former head, Alexey Shemonayev, suddenly disappeared. (Sources close to the Kremlin confirmed to Meduza that the money really is missing and Shemonayev is now a wanted man.)

There are also businessmen in South Ossetia trying to establish themselves without the state’s help. Taymuraz Goginov and Vasily Shishkov, who own the Crimean winery “Fotisal,” invested their own funds in a small factory, and this August they opened a winery. The first bottles should ship to Russia in February 2019. As the vines have only just been planted, all the ingredients for winemaking will be imported from Russia for the first five years. Former South Ossetian Economic Development Minister Vilyam Dzagoyev says he’s convinced, however, that the enterprise only exists to make wine from Moldovan materials, which can’t be exported directly to Russia, because of sanctions.

Timur Tskhubrati’s business has a similar rationale — only it was founded to bypass higher tariffs, not circumvent export sanctions. He got the idea from friends in Iran, who said it was more expensive to ship pistachios directly to Russia than send them to South Ossetia, where they are roasted and then exported to the Russian market without high tariffs. Tskhubrati has already imported the first batch to test the scheme, and he now plans to invest his own money in pistachio roasting on an industrial scale.

Timur Tskhubrati with his first shipment of pistachios imported from Iran, July 2018
Ilya Zhelgulev / Meduza
Rustam Dzhivoyev in Vladikavkaz, July 2018
Ilya Zhelgulev / Meduza

For all their usefulness, financial ties to the South Ossetian government can also be a hindrance, sources told Meduza, and this is especially true when there are changes in the government. For example, officers from the local Accounts Chamber and the KGB recently searched Lastovich’s business. He says this is how Anatoly Bibilov is dealing with the commercial projects launched under the Tibilov administration, but he insists that he has no issue with South Ossetia’s new president, claiming that he even helped Bibilov resolve a problem with a bankrupt supplier.

The change in power also didn’t do any favors for Rustam Dzhivoyev, the former head of South Ossetia’s Znaur District, who filed an application with the republic’s investment agency to open a turkey farm. He was supposed to get the money, but then Bibilov took office and fired him. Today, Dzhivoyev lives in Vladikavkaz, North Ossetia’s capital, where he plans to breed fowl.

Hope tangled in red tape

After Russia took South Ossetia under its wing, life here has begun to revolve more and more around the state. In the opinion of Vissarion Doguzov, the chairman of the local union of industrialists and entrepreneurs, this is killing local business. The majority of South Ossetia’s residents, he says, now live from paycheck to paycheck, and Doguzov’s construction company, “Metsenat,” gets very few orders. You can’t expect contracts from either the state or ordinary people, because it’s “virtually impossible to build anything on these incomes.”

Having survived the lean postwar years of the 1990s and the blockade years of the 2000s, Doguzov’s business has been around for 25 years. He’s now planning to shut down operations, however, because there simply aren't enough customers. Things were easier before the 2008 war, he says, when international organizations were present in South Ossetia and Metsenat worked with them. An Austrian humanitarian group hired his company to build a boarding school, and there were also orders from the Red Cross and the OSCE. “It was nice working with the Europeans,” Doguzov recalls. “There was a procurement order, the parameters of the job were clear, and [bids for contracts] were submitted in closed envelopes. The commission chose the best firm for the job, the rules of the game were transparent, and there were no complaints. If it didn’t work out, you could leave and prepare for the next contract.”

Doguzov says things have changed since then. “There’s not even talk that your firm could possibly participate. The minister says, ‘It’s not up to me.’ So who decides, then?” Doguzov complains.

“All these OSCEs and other foreign organizations created a fifth column among us,” argues former Economic Development Minister Vilyam Dzagoyev. “[These groups] profited by recruiting businessmen.”

The republic’s current economic development minister, Gennady Kokoyev, described the current situation to Meduza like this: turning to local entrepreneurs would be riskier because they might fail, as more often than not they lack the necessary equipment. Asked whether it might be more useful for the republic if local companies were able to borrow money to purchase needed hardware before vying for state procurement contracts, Kokoyev answered, “Why should I have to read the tea leaves [to guess which local businessmen are capable], when there are already fully equipped Russian companies?”

When reminded that the South Ossetian authorities typically hire local companies — not Russian businesses — for road work, Kokoyev responded with the same argument: “Private capital is interested in earning a profit, and that sphere is related to security.” Kokoyev is convinced that state interests should be “shielded from the risks and threats that come with prioritizing uncontrolled support for private business.”

Doguzov says the result of this attitude is that it’s harder than ever to do business in South Ossetia today. “In purely financial terms, maybe we’ve seen worse,” he admits. “But there was hope then. Now there’s not even hope that anything will improve.”

“Metsenat” director Vissarion Doguzov in Tskhinvali, July 2018
Ilya Zhelgulev / Meduza

President Bibilov disagrees with Doguzov’s assessment, pointing out that the government actually enacted a new law allocating two percent of its annual revenues to support for local businesses. At the same time, South Ossetian officials acknowledge that the public sector now accounts for about 80 percent of the republic’s GDP, and a third of all government earnings comes from just three sources: taxes on South Ossetia’s state energy company and the local subsidiaries of the Russian companies Gazprom and Megafon. Meduza’s source in the South Ossetian government claims that the state’s revenues have almost tripled in the past five years, thanks mainly to the more efficient collection of excise duties and taxes on state enterprises.

“Little by little, we’re restoring order,” says Bibilov. “Previously, construction firms were disorganized and the tax office couldn’t understand what was what. We sorted out all of that. Many companies used to pay their salaries in cash, and we also brought order to that. Guys, stop. There’s no need to cheat the state. Does the state help you out? Yes it does. Does the state behave honestly towards you? Yes. Do we take anything away from you illegally or ask for kickbacks? No. So why are you cheating us?”

Having improved its tax-collection capacity, South Ossetia’s government is now able to think about new sources of income, but the number of private enterprises in the republic isn’t growing. In recent years, no new major taxpayers have come to the region, with one exception: the International Settlement Bank. Established just three years ago, the bank immediately became one of South Ossetia’s biggest taxpayers. What makes the International Settlement Bank so special? It’s the institution that handles the transactions whenever businesses in the unrecognized DNR and LNR (Donetsk and Luhansk People’s Republics) need to make legal or non-cash payments to Russian companies.

The most senior officials

Over the past two years, more than 200 companies from the DNR and LNR have been registered in South Ossetia. The explanation is simple: Ukraine declared a banking blockade against the self-declared republics, making direct financial ties between them and Russia impossible. Several sources told Meduza that Moscow orchestrated South Ossetia’s recognition of the DNR and LNR, allowing the breakaway republic (recognized by Russia) to serve as a back channel to counterparts in eastern Ukraine, without technically violating the Minsk Agreement. (Abkhazia, incidentally, has not followed suit.)

At Moscow’s request, companies from the DNR and LNR with branches in South Ossetia are subject to a special tax regime, paying just one percent of their profits to the local government. As such, these businesses provide the state with little revenue, amounting to about 20 million rubles ($302,000) in 2017, according to Meduza’s source, averaging roughly 90,000 rubles ($1,360) a year per company.

President Bibilov, meanwhile, doesn’t see a problem here: “If the government made [this] decision, then I support it,” he says. “If the government of South Ossetia is doing all it can to help these entities to stand on their own two feet, let [them pay] half a percent — let them even pay zero percent.”

South Ossetia’s single largest taxpayer with ties to the DNR and LNR is the International Settlement Bank, which serves the accounts of Donetsk and Luhansk companies in the republic. Last year, the bank contributed 14 million rubles ($211,470) to the local budget. Meduza spoke to Oleg Dzgoyev, the International Settlement Bank’s board chairman, at his office on the second floor of the same building that houses the South Ossetian Central Bank. His office is a small room with a single table that looks like a school desk. He sits on a stool.

“Who are our clients?” begins Dzgoyev. “Where they’re from, where they were born, where they were baptized — I don’t know. We’re presented with documents, and we open accounts for the legal entities concerned. We don’t serve individuals.”

In his words, the bank was founded “by two beneficiaries from South Ossetia,” and its capital amounts to 60 million rubles ($905,300). In response to a question about the bank’s turnover, Dzgoyev says it earns tens of billions of rubles annually. After the interview ends, however, he telephones and clarifies: it’s actually less than a billion rubles (about $15 million). The funds, he says, are transferred mostly over the Internet, meaning that the bank’s clients don’t need to be located in South Ossetia.

The International Settlement Bank denies having any ties to Moscow, and a Moscow-based bank with an identical name told Meduza that it’s never opened a branch in South Ossetia. Nevertheless, South Ossetia’s International Settlement Bank has established an organization in Moscow named the “Charitable Foundation for the Support of International Humanitarian Projects,” whose president until 2017 was Vladimir Pashkov, the former deputy governor of Russia’s Irkutsk region. Apparently mistaking the South Ossetian International Settlement Bank for the Russian bank with the same name, Ukraine’s National Security Service says Moscow finances the LNR through the “Humanitarian Projects” charity.

According to Timur Tskhubrati, all large financial transactions with Ukraine’s self-declared separatist republics eventually need to be discussed with officials in Russia. For example, he says he recently found a buyer in the LNR for plastics and construction materials, but the South Ossetian International Settlement Bank blocked the 21-million-ruble ($316,900) funds transfer. “They started harassing us, demanding that we open an account in Rostov, and then another in Moscow,” he recalls. “We were talking to Vasily Shadyan [a top official at the South Ossetian International Settlement Bank] about why our money was being held up. Then they started asking for a transaction passport.”

Tskhubrati says the bank told him it “bears political risks” when working with major transactions, and it sent him to the “Center for International Settlements,” a Moscow-based non-bank credit organization created for transfers between Russia and the self-declared republics in eastern Ukraine (Meduza wrote extensively about this company here). In the end, Tskhubrati was never able to close the deal.

In theory, the largest Ossetian company connected to the DNR and LNR shouldn’t be the International Settlements Bank at all. In March 2017, all the largest enterprises in the Donetsk region (for example, the Yenakievsky and Makeevsky metallurgical plants, the Khartsyzk pipe plant, and others) began registering themselves as branches of Vneshtorgservis, which is incorporated in South Ossetia. In early April, then DNR leader Alexander Zakharchenko signed a decree making the South Ossetian company the “temporary administrator” of these companies, most of which previously belonged to the oligarch Rinat Akhmetov, the richest man in Ukraine. Akhmetov’s assets in the Luhansk region met the same fate: control of Krasnodonugol, a large coal-mining enterprise with 12,000 employees that continued to operate even after the war broke out, was also transferred to Vneshtorgservis.

The Hotel Alan, the same place Vneshtorgservis’s office is officially registered, July 2018
Ilya Zhelgulev / Meduza

“You know, it’s better not to ask about Vneshtorgservis,” said Alan Albarov, the head of South Ossetia’s Chamber of Commerce, his voice turning to a whisper as he mentioned the company’s name. “The most senior officials are involved with it.” The director of Vneshtorgservis is Vladimir Pashkov — the very same former Irkutsk deputy governor and ex-president of the “Humanitarian Projects” charity established by the International Settlements Bank. (Meduza was unable to reach Pashkov for comment.) Spokespeople for Rinat Akhmetov’s company “Metinvest” told Meduza that the last time they knew what was happening at their enterprises in territories under separatist control was in March 2017.

Employees at factories previously owned by Akhmetov and the newspaper Kommersant’s sources say Vneshtorgservis is actually controlled by Sergey Kurchenko, a businessman close to the family of former Ukrainian President Viktor Yanukovych. (Kurchenko has lived in Moscow since 2014.) The U.S. Treasury also acknowledged the relationship between Kurchenko’s company “Gaz-Alians” and Vneshtorgservis when it announced sanctions against both companies in January 2018. The previous spring, incidentally, then DNR “Revenue Minister” Alexander Timofeev denied that Kurchenko had any hand in Vneshtorgservis’s operations.

Despite Timofeev’s comments, Meduza has obtained documentary evidence of the connection between Vneshtorgservis and Sergey Kurchenko, showing that Gaz-Alians certifies goods produced by Vneshtorgservis-controlled companies in the DNR and LNR for sale throughout the Eurasian Customs Union. For example, Gaz-Alians obtained certificates for production at the Makeevkoks metallurgical factory, and the Yenakievsk and Yasinovsky coal carbonization plants. Kurchenko’s representatives did not promptly respond to Meduza’s questions about his connections to Vneshtorgservis.

Formally registered in Tskhinvali, Vneshtorgservis is required to pay taxes in South Ossetia, but President Anatoly Bibilov says he’s never heard of the company. Vladimir Kadzhayev, who heads the republic’s tax service, also told Meduza that he had no knowledge of the company, and asked his staff to find out more. They were able to locate the company’s accounts from 2017, which stated that Vneshtorgservis had no earnings that whole year. According to information from Rinat Akhmetov’s System Capital Management, however, his former factories in eastern Ukraine earned $60 million in 2016 — three times more than South Ossetia’s entire annual budget.

Vneshtorgservis is registered on Geroyev Street in Tskhinvali, on the premises of the Hotel Alan — a new symbol of South Ossetia’s modern history, made famous after the money allocated by Moscow for its restoration mysteriously disappeared. The building looks much like it did after the war ended; there are empty stairwells, holes in the walls, and unlit hallways. Just like President Bibilov, the security guard stationed outside knew nothing about Vneshtorgservis. The hotel’s rooms, incidentally, take up just three floors of the building. The other two stories are unoccupied.

New housing in Tskhinvali for victims of the 2008 war, July 2018
Ilya Zhelgulev / Meduza

Report by Ilya Zhelgulev from Tskhinvali. Ivan Golunov contributed to this report. Translation by Maxim Edwards.