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TO RUEHC/SECSTATE WASHDC IMMEDIATE 6214
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHXD/MOSCOW POLITICAL COLLECTIVE IMMEDIATE
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S E C R E T SECTION 01 OF 03 MOSCOW 000317

SIPDIS

E.O. 12958: DECL: 02/11/2020
TAGS: PGOV PREL PHUM PINR ECON KDEM KCOR RS
SUBJECT: THE LUZKHOV DILEMMA

Classified By: Ambassador John R. Beyrle.  Reason:  1.4 (b), (d).

¶1. (C) Summary:  Moscow Mayor Yuriy Luzhkov remains a loyal
member of United Russia, with a reputation for ensuring that
the city has the resources it needs to function smoothly.
Questions increasingly arise regarding Luzhkov's connections
to the criminal world and the impact of these ties on
governance.  Luzhkov remains in a solid position due to his
value as a consistent deliverer of votes for the ruling
party.  Unfortunately, the shadowy world of corrupt business
practices under Luzhkov continues in Moscow, with corrupt
officials requiring bribes from businesses attempting to
operate in the city.  End Summary.

Overview: The Kremlin's Luzhkov Dilemma
---------------------------------------

¶2. (C) Moscow Mayor Yuriy Luzhkov is the embodiment of
political dilemma for the Kremlin.  A loyal, founding member
of United Russia and a trusted deliverer of votes and
influence for the ruling party and its leader, Prime Minister
Putin,  Luzhkov's connections to Moscow's business community
-- the big and legitimate as well as the marginal and corrupt
-- has enabled him to call for support when he needs it, to
deliver votes for United Russia, or to ensure that the city
has the resources it needs to function smoothly.  Luzhkov's
national reputation as the man who governs the ungovernable,
who cleans the streets, keeps the Metro running and maintains
order in Europe's largest metropolis of almost 11 million
people, earns him a certain amount of slack from government
and party leaders.  He oversaw what even United Russia
insiders acknowledge was a dirty, compromised election for
the Moscow City Duma in October, and yet received only a slap
on the wrist from President Medvedev.

¶3. (C) Muscovites are increasingly questioning the standard
operating procedures of their chief executive, a man who, as
of 2007, they no longer directly elect.  Luzhkov's
connections to the criminal world and the impact that these
ties have had on governance and development in Moscow are
increasingly a matter of public discussion.  Although Luzhkov
was successful in winning court-ordered damages from
opposition leader Boris Nemtsov for his recent publication
"Luzhkov: An Accounting," Nemtsov and his Solidarity-movement
allies were heartened by the fact that the judge did not
award damages on the basis of the corruption accusations
themselves, but rather on a libel technicality.

¶4. (C) Few believe that Luzhkov will voluntarily relinquish
his post prior to 2012, when the Moscow City Duma must submit
a list of mayoral candidates to Medvedev for his selection.
United Russia will probably call on Luzhkov's political
machine and his genuine public support to deliver votes for
them in the 2011 State Duma elections, as well as the 2012
Presidential contest.  With no apparent successor in line,
and with no ambitions beyond remaining mayor, Luzhkov is in a
solid position.  The evidence of his involvement -- or at
least association -- with corruption remains significant.
This cable presents that side of Luzhkov -- one that bears
not only on Luzhkov and his handling of local politics, but
on Putin and Medvedev as they move toward the 2012 elections.

Background on Moscow's Criminal World
-------------------------------------

¶5. (C) The Moscow city government's direct links to
criminality have led some to call it "dysfunctional," and to
assert that the government operates more as a kleptocracy
than a government.  Criminal elements enjoy a "krysha" (a
term from the criminal/mafia world literally meaning "roof"
or protection) that runs through the police, the Federal
Security Service (FSB), Ministry of Internal Affairs (MVD),
and the prosecutor's office, as well as throughout the Moscow
city government bureaucracy.  Analysts identify a
three-tiered structure in Moscow's criminal world.  Luzhkov
is at the top.  The FSB, MVD, and militia are at the second
level.  Finally, ordinary criminals and corrupt inspectors
are at the lowest level.  This is an inefficient system in
which criminal groups fill a void in some areas because the
city is not providing some services.

¶6. (C) XXXXXXXXXXXX,
told us that Moscow's ethnic criminal groups do business and
give paybacks.  It is the federal headquarters of the
parties, not the criminal groups, who decide who will
participate in politics.  XXXXXXXXXXXX argued that the
political parties are the ones with the political clout;
therefore, they have some power over these criminal groups.

MOSCOW 00000317  002 OF 003

Crime groups work with municipal bureaucrats, but at a low
level.  For example, the Armenians and Georgians were
formerly heavily involved in the gambling business before
city officials closed the gambling facilities.  These ethnic
groups needed protection from law enforcement crackdowns, so
they sought cooperation with the municipal bureaucrats.  In
such scenarios, crime groups paid the Moscow police for
protection.

Luzhkov's Links to Criminal Figures
-----------------------------------

¶7. (S) XXXXXXXXXXXX
XXXXXXXXXXXX, told us that Luzhkov's wife,
Yelena Baturina, definitely has links to the criminal world,
and particularly to the Solntsevo criminal group (widely
regarded by Russian law enforcement as one of the most
powerful organized crime groups in Russia).  According to the
Internet article, "On the Moscow Group," Vladimir
Yevtushenko, the head of the company Sistema, is married to
Natalya Yevtushenko, Baturina's sister.  Sistema was created
with Moscow city government-owned shares, and Sistema
initially focused on privatizing the capital's real estate
and gas.  Sistema's president, Yevgeny Novitsky, controlled
the Solntsevo criminal gang.  Today, Sistema has spun off
into various companies, which implement projects that
typically include 50 percent funding from the Moscow city
government.

¶8. (S) According to XXXXXXXXXXXX, Luzhkov used criminal money to
support his rise to power and has been involved with bribes
and deals regarding lucrative construction contracts
throughout Moscow.  XXXXXXXXXXXX told us that Luzhkov's friends and
associates (including recently deceased crime boss Vyacheslav
Ivankov and reputedly corrupt Duma Deputy Joseph Kobzon) are
"bandits."  He told us that he knew this because he formerly
had contacts in these criminal groups, but many of his
contacts have since been killed.  XXXXXXXXXXXX said that the Moscow
government has links to many different criminal groups and it
regularly takes cash bribes from businesses.  The people
under Luzhkov maintain these criminal connections.  Recently,
ultranationalist LDPR opposition party leader Vladimir
Zhirinovskiy strongly criticized Luzhkov and called for him
to step down, claiming that Luzhkov's government was the
"most criminal" in Russian history.  This remarkable
denunciation, carried on state TV flagship Channel One, was
widely seen as an indirect Kremlin rebuke of Luzhkov.

¶9. (S) XXXXXXXXXXXX told us everyone knows that Russia's laws do not
work.  The Moscow system is based on officials making money.
The government bureaucrats, FSB, MVD, police, and
prosecutor's offices all accept bribes.  XXXXXXXXXXXX stated that
everything depends on the Kremlin and he thought that
Luzhkov, as well as many mayors and governors, pay off key
insiders in the Kremlin.  XXXXXXXXXXXX argued that the vertical
works because people are paying bribes all the way to the
top.  He told us that people often witness officials going
into the Kremlin with large suitcases and bodyguards, and he
speculated that the suitcases are full of money.  The
governors collect money based on bribes, almost resembling a
tax system, throughout their regions.  XXXXXXXXXXXX described how
there are parallel structures in the regions in which people
are able to pay their leaders.  For instance, the FSB, MVD,
and militia all have distinct money collection systems.
Further, XXXXXXXXXXXX told us that deputies generally have to buy
their seats in the government.  They need money to get to the
top, but once they are there, their positions become quite
lucrative money making opportunities.  Bureaucrats in Moscow
are notorious for doing all kinds of illegal business to get
extra money.

¶10. (S) According to XXXXXXXXXXXX, Luzhkov is following orders
from the Kremlin to not go after Moscow's criminal groups.
For example, XXXXXXXXXXXX argued that it was only a public
relations stunt from Putin to close gambling.  In contrast to
XXXXXXXXXXXX said he did not see the sense in suitcases
of money going into the Kremlin since it would be easier to
open a secret account in Cyprus.  He speculated that the
Moscow police heads have a secret war chest of money.
XXXXXXXXXXXX said that this money is likely used to solve
problems that the Kremlin decides, such as rigging elections.
It can be accessed as a resource for when orders come from
above, for example, for bribes or to pay off people when
necessary.  XXXXXXXXXXXX postulated that the Kremlin might say
to a governor that he can rule a certain territory but in
exchange he must do what the Kremlin says.

¶11. (C) Notwithstanding Luzhkov's solid position, some of our
contacts believe that cracks have appeared in his armor, due

MOSCOW 00000317  003 OF 003

to his corrupt activities.  XXXXXXXXXXXX told us that Luzhkov has
many enemies because his wife has the most lucrative business
deals in Moscow and many people think Luzhkov has received
too much money.  The son of the head of the interior police,
Vladimir Kolokotsev, told XXXXXXXXXXXX that Kolokotsev's number one
job is to get Luzhkov out within a year.  Kolokotsev was
credited with removing long-standing Governor Yegor Stroyev
from Orel.  XXXXXXXXXXXX asserted that Luzhkov is "on his way
out," although he acknowledged that the Kremlin has not
identified a suitable replacement yet.  Issues such as
corruption and traffic congestion have, to a certain degree,
eroded Luzhkov's popularity.  Putin, XXXXXXXXXXXX said, will
likely pick the quietest and least expected person to replace
Luzhkov.

In Moscow, Everyone Needs a "Krysha"
------------------------------------

¶12. (C) According to many observers, the lawless criminal
climate in Russia makes it difficult for businesses to
survive without being defended by some type of protection.
XXXXXXXXXXXX explained how bribes work in Moscow:  a cafe owner
pays the local police chief via cash through a courier.  He
needs to pay a certain negotiated amount over a certain
profit.  The high prices of goods in Moscow cover these
hidden costs.  Sometimes people receive "bad protection" in
the sense that the "krysha" extorts an excessive amount of
money.  As a result, they cannot make enough of a profit to
maintain their businesses.  If people attempt to forego
protection, they will instantly be shut down.  For example,
officials from the fire or sanitation service will appear at
the business and invent a violation.  According to
XXXXXXXXXXXX, everyone has bought into the idea of protection
in Moscow, so it has become a norm.  In general, Muscovites
have little freedom to speak out against corrupt activities
and are afraid of their leaders.

¶13. (C) XXXXXXXXXXXX explained that Moscow business owners
understand that it is best to get protection from the MVD and
FSB (rather than organized crime groups) since they not only
have more guns, resources, and power than criminal groups,
but they are also protected by the law.  For this reason,
protection from criminal gangs is no longer so high in
demand.  Police and MVD collect money from small businesses
while the FSB collects from big businesses.  According to
XXXXXXXXXXXX, the FSB "krysha" is allegedly the best protection.  He
told us that, while the MVD and FSB both have close links to
Solntsevo, the FSB is the real "krysha" for Solntsevo.  This
system is not an incentive for smaller businesses and nobody
is immune; even rich people who think they are protected get
arrested.  According to Transparency International's 2009
survey, bribery costs Russia USD 300 billion a year, or about
18 percent of its gross domestic product.  XXXXXXXXXXXX argued
that the "krysha" system has led to an erosion of police
internal discipline.  For instance, young police officers
spend their money buying luxury vehicles that a normal worker
could never afford.

Comment
-------

¶14. (S) Despite Medvedev's stated anti-corruption campaign,
the extent of corruption in Moscow remains pervasive with
Mayor Luzhkov at the top of the pyramid.  Luzhkov oversees a
system in which it appears that almost everyone at every
level is involved in some form of corruption or criminal
behavior.  Putin and Medvedev's dilemma is deciding when
Luzhkov becomes a bigger liability than asset.  While public
sentiment against Luzhkov has grown since the "tainted"
elections in October 2009, United Russia's leadership knows
that he has been a loyal supporter who can deliver voter
support. Ousting Luzhkov before he is ready to go could
create major difficulties because he could link others in the
government to the corruption.  While reforming Luzhkov's
questionable activities might seem like the right thing to
do, for now keeping him in place, efficiently running the
city, is United Russia's best option.  Ultimately, the tandem
will put Luzhkov out to pasture, like it has done with fellow
long-term regional leaders like Sverdlovsk oblast governor
Edward Rossel and Tatarstan President Mintimir Shaymiyev.

Beyrle