Fifth International: A Case Study of the Miloš Zeman Enigma. Investigation by Yuri Felshtinsky G

Introduction: The Fifth International

Karl Marx was involved in the creation of the First International. Friedrich Engels was involved in the Second. Vladimir Lenin created the Third International, communism. Lev Trotsky created the Fourth International. And Vladimir Putin headed the Fifth International, although its creation was not announced. Unlike the first four, this is the International of right-wing neo-fascist forces using fragments of the communist world that collapsed in 1991 in their struggle against democracies: an International connecting two extremist wings. An American political strategist Steve Bannon became its main ideologist and organizer outside of Russia.

In 2000, Putin, a former KGB lieutenant colonel and former FSB director, was brought to power in Russia. I write "was brought to power" and not "was elected" because Putin became president thanks to a cascade of secret anti-constitutional manipulations that were not related to the democratic election process provided for in the Russian Constitution.

First, in August 1999, Putin was transferred from the post of FSB director to that of prime minister, so that under the constitution he would have the right to become Russia’s acting president in the event of the resignation or death of Boris Yeltsin. This was the first stage of the coup d’état carried out by Russia’s FSB, about which, in a fit of sincerity, on 20 December 1999, so-called "Chekist Day" (Den' Chekista), Putin told the audience to mark the anniversary of the state security asset:

"The group of FSB officers seconded by you to work under the government cover has carried out successfully the first stage of its mission."

The second stage followed several days later: on 31 December 1999, Yeltsin retired, making Putin his formal successor and de facto president. The third stage of the operation –guiding Putin through the presidential elections prescribed by law – turned out to be a formality, a “technical matter”: in a country that did not know democracy, guiding Putin on 26 March 2000 through the electoral procedures was a well-orchestrated rubber stamp.

However, in March 2000, it was not a matter of ordinary rigged elections and not a typical hand-picked candidate. For the first time, a former head of the FSB was brought to power in Russia, accountable only to the security services, which in 1991 had already freed themselves of the Communist Party control that dated back to December 1917. Over the next eight years, Putin destroyed the only obvious conquest of the "August Revolution of 1991" in Russia, the free press; turned the State Duma (Russia’s lower house of parliament) into a rubber stamp for the Kremlin; destroyed the upper house of parliament and the institution of elected governors; usurped the country's electoral system at the local and central levels; and appointed thousands of former KGB officers, employees and agents to the highest political and economic posts in government. And so he seized power in the country: indefinitely, as it turned out.

Putin returned the old Soviet national anthem (putting new lyrics to the old tune) and the old Soviet TASS [Telegraph Agency of the Soviet Union] news agency, and announced that he considers the collapse of the USSR to be the greatest geopolitical catastrophe of the 20th century and a personal tragedy. In 2008, for the first time since the fall of Soviet power, Russia used its regular army outside its borders, invading Georgia. In 2014, Russia invaded Ukraine, annexed the Crimean Peninsula and kindled a hotbed of war in the southeast of its neighboring country, where it created two puppet “people’s republics” (the Donetsk and Luhansk people’s republics). Through a series of bilateral agreements, the western border of Belarus, the territory that Russia has agreed to protect from external enemies, was effectively transferred under Kremlin control. The effective annexation of Belarus was silent and invisible to the global community.

The military actions against Georgia and Ukraine were accompanied by anti-Georgian and anti-Ukrainian propaganda campaigns of an unprecedented scale that fomented nationalist feelings among Russian citizens. As a result of these campaigns, in which the state-controlled Russian television, press and (to a lesser extent) internet took an active part, a majority of Russians transformed from neutral-apolitical to militantly fascist. Western democracies, as in Soviet times, were again declared the obvious evil and enemies of Russia. Right-wing nationalist forces inside the country and beyond have become Kremlin allies and supporters. Their public and, where necessary, secret support from the Russian leadership and security services have strengthened the influence of far-right and neo-Nazi movements both in Russia and abroad, primarily in Europe (Italy, Germany and France).

The usual arsenal employed in Moldova (Transnistria), Georgia, Ukraine and Belarus was supplemented by another powerful weapon: interference in presidential and parliamentary elections in European countries and the US. It turned out that this is a more effective and efficient way to strike at the enemy: to place your man, as in 2000 in Russia, into the important position of head of state, or at least contribute to this. In some countries this happened (Hungary, the Czech Republic and the US), while in others it did not (Montenegro and France). The Kremlin’s clear strategic objectives have also been determined: foment wars in the former Soviet republics that have not managed to join NATO to prevent the expansion of the North-Atlantic alliance (this alliance traditionally does not accept countries with unresolved territorial conflicts into its ranks); split, weaken or dissolve NATO; collapse the European Union; expand Russia’s territory by annexing neighboring territory (so far, in total, Russia has annexed 268,128 square kilometers with a population of 16.357 million).

Since 2008, everything has been subordinated to the achievement of these goals. A new generation of security service officers has been laying the foundation for the implementation of this ambitious program since August 1991. The frame of this new building was erected on 31 December 1999, when the faint-hearted and decrepit Yeltsin voluntarily (or forcedly) resigned, giving Russia, with all its population and wealth, to the FSB, led by Colonel Putin. Over the next 20 years – a historically insignificant period – Putin returned Russia to a state where it again, as in Soviet times, began to pose a military threat to peace. Putin openly threatens humanity – using speeches, cartoons and documentaries – with thermonuclear war, each time emphasizing (which even Soviet leaders did not do) that Russia would win such a war. The Russian leader has created and is actively using a new type of hybrid warfare. This warfare encompasses all possible means of inflicting damage on the enemy, from military sabotage operations to sophisticated forms of bribery.

The declared task of the Fifth International is to destroy the status quo that was created after the collapse of the Soviet empire on the basis of two global stability structures: the European Union and NATO. The new decade that we will enter together with Colonel Putin will be a battlefield where, as has already happened many times in history, the forces of democracy and fascism (neo-fascism) will clash, with Putin’s Russia as the strike force creating its own Fifth Columns around the world of which neither Mussolini nor Franco could have dreamed.

Prologue: Zeman, the most pro-Putin president in Europe

In late 2018, the counterintelligence arm of the Security Information Service (Czech: Bezpečnostní Informační Služba, or BIS), the Czech Republic’s primary domestic national intelligence agency, reported about the threats that the country had faced in 2017. That year, a number of Czech government agencies, including the Ministry of Foreign Affairs, were subjected to cyberattacks. According to the BIS, the Russian security services were behind the attack, which resulted in hackers gaining access to the email accounts of dozens of employees of the Czech Ministry of Foreign Affairs. Attempts were also made to hack the e-mail accounts of several employees of the Czech Ministry of Defense. In addition, Russia’s diplomatic and intelligence agencies were involved in attempts to gain control of several key enterprises and companies in the Czech Republic, as well as in the organization of information campaigns in the interests of Moscow.

The Czech Republic has an extremely large Russian diplomatic presence for such a small country. According to 2016 data, 51 diplomats and 86 administrative and technical staff worked at the embassy in Prague and at the Russian consulates in Karlovy Vary and Brno. (The Czech Republic has 20 diplomats and 45 non-diplomatic employees in Russia). The BIS claimed that a significant number of the Russian diplomats operating in the Czech Republic are engaged in intelligence activities, and therefore, from the point of view of security, counterintelligence views all Russian diplomatic representatives with suspicion, "from ambassador to driver."

Czech journalist Ondrej Kundra: "The Russian embassy is a monster now. They have something like 120 employees. In addition, they have offices in Karlovy Vary and Brno. So, together this is like 200 people." (Conversation with Ondrej Kundra, 7 May, 2019)

The New York Times also wrote about this matter: "The 2015 annual report by the domestic intelligence service stated that the extraordinary number of Russian diplomats accredited to the embassy here meant many were working as intelligence officers. The number of Russian Embassy diplomats is generally pegged at 120 to 140, compared with about 40 Foreign Service officers for the United States."

Notably, over the past several years, eleven Russian spies were expelled from the Czech Republic. According to Andor Shandor, former head of military intelligence of the Czech Republic, they are not alone in acting for the benefit of the Russian Federation: "More than half of employees of the Russian embassy may be connected with the intelligence service." 

According to Ondrej Kundra who covers Russian subversive activities in the Czech Republic, the situation did not arise overnight: "In the 1960s, when there was a democratic movement in Czechoslovakia, Yuri Andropov became head of the KGB and one of the decisions he made was to have a rezedentura [an intelligence station in a foreign city] in the Soviet embassy in Prague. This was one of the first rezedentura in the region. They send to Prague many spies who stayed here. The rezedentura was becoming bigger and bigger, it had many contacts here. They liked the country; it was also safe. There are so many Russian spies here that the Czech counterintelligence service (which is doing a good job) just is not able to control the situation because it is comparatively small against Russian spies whom are just too many."

Milos Zeman and Vladimir Putin. Photo by ЕРА

Since 2013, Miloš Zeman, arguably the most pro-Russian politician in Europe, has been president of this country that is stuffed with Russian intelligence. On 21 August 2018, as the Czech Republic marked the 50th anniversary of the crushing of the "Prague Spring" by Warsaw Pact troops, an outpouring of sympathy and remembrances flowed from many places with one notable exception: Prague Castle. Zeman, one of Russian President Vladimir Putin's strongest allies, did not deliver a speech or attend any commemorative events that day. His Prime Minister, Andrej Babiš, downplayed Russia’s role in the 1968 intervention, as well, stating that "It doesn't matter which nationality" was responsible for ordering the 1968 invasion. 

This happened during Zeman’s second term as president. He was re-elected in January 2018. During the election campaign, prior to his victory, he heard a lot of unflattering things about his policies regarding present-day Russia and its president, Putin.

On 26 January 2018, director of the Prague-based think tank European Values Jakub Janda wrote:

"Czech President Miloš Zeman has become the most influential Kremlin ally in Central Europe. He holds ceremonial powers as head of state, but his position also allows him to support Russian President Vladimir Putin extensively. In foreign policy, Zeman has often stood contrary to the Czech government, which generally defends the positions of the EU and NATO.

Like many Kremlin proxies, Zeman often reiterates Kremlin messages, including denying the presence of organized Russian troops in Ukraine, arguing that Crimea is Russian, and demanding that the West lift the sanctions it imposed on Russia. He is portrayed by Russian propaganda as an independent, strong anti-American leader who adores Putin. If size of countries is taken into account, Zeman, the president of a country with 10 million people, is the second most quoted European leader in the Russian information space, right after German Chancellor Angela Merkel. […]

Zeman systematically aids Kremlin goals inside the Czech Republic. Local extremists and conspirators are fed pro-Kremlin disinformation, which they gladly reproduce, as they share the same enemy as Moscow: media and the political mainstream. The disinformation community is usually fringe and irrelevant, unless they find strong political figures who deliver legitimacy. As the Czech Security Information Service (BIS) points out, Russia’s goal is to create the perception that "everyone is lying" to "weaken the society’s will for resistance." Zeman has spent years legitimizing disinformation outlets by giving them dozens of interviews in which he attacks mainstream politics".

On 8 January 2018, Czech journalist Robert Břešťan wrote in Hlídací pes: "There is a connection between the Kremlin and Zeman, and the Russians had a hand in financing the current president’s large-scale election campaign."

On the same day, Pavel Šafr asked on the portal Forum 24: "Where does President Miloš Zeman get money for election billboards across the country for which other candidates have no money?" Šafr noted that the campaign was officially being funded by “a club of Zeman’s friends" backed by Czech businessmen linked to the Russians. Šafr also stated that during Zeman’s first term as president, he fundamentally changed the Czech Republic because of his characteristically autocratic style of government, and that the once liberal-democratic Czech Republic had begun to resemble the political system established in Russia, warning: "If Zeman wins the election again, this trend towards Putin’s style of government will only be strengthened." 

One of Zeman's rivals, presidential candidate Jiří Drahoš, was convinced that the Kremlin was highly interested in a second mandate for the current Czech president, who is known for his sympathy towards Russia and surrounded by people associated with it. In addition, Zeman questioned the need for the Czech Republic to remain part of the European Union. All this, as Drahoš stated in an interview with Deník on 9 January 2018, was fully consistent with Russian interests. He was also confident that the Czech Republic was flooded with Russian agents and security service officers who are trying to influence the outcome of the elections. Drahoš believed there is a lot of evidence that Russia has long been engaged in such subversive activities in EU countries. 

Mirek Topolánek, another presidential candidate, was sure that the Russian leadership wants to see Zeman at the head of the Czech Republic. On 9 January 2018, in an interview with Aktuálně.cz, he stated that Zeman was fawning before Russia and engaged in "diplomatic prostitution." Such a policy only suits Czech businessmen who would like to work with the Russians. Russia is a close neighbor of the Czech Republic, and it is necessary to maintain good relations and do business with it, but it is impossible to redirect Czech foreign policy towards Russia, as Zeman wants. Topolánek emphasized that Russia has been aggressive recently; therefore the Czech Republic should take a tough stance, joining other EU countries.

The New York Times wrote: "Mr. Zeman has continued backing pro-Kremlin policies. He endorsed the Russian intervention in Syria, and last summer called for a ‘Czechxit’ referendum like the British vote to withdraw from the European Union." 

On 10 January 2018, analyst Roman Matsa wrote on the Bez-cenzury portal that “Zeman is a profitable Russian project.” Initially, certain funds were invested in the project “Miloš Zeman at the head of the Czech Republic” (they went to the first election campaign), but now this politician has become completely independent and extremely useful for Russia. The Russians are extremely interested in having Zeman get a second presidential mandate. Indeed, no one else during their visit to Russia would call for the lifting of anti-Russian sanctions, would argue that Crimea is Russian, that Russia is ten times more important to the Czech Republic than France, and even more so would forbid to speak their native language during meetings. Therefore, according to Roman Matsa, the Kremlin is so interested in this faithful servant of Russian propaganda.

Matsa was referring to Zeman’s visit to Moscow on 9 May 2015, on the anniversary of the end of the war with Germany, when all other heads of state – except Zeman, the prime minister of Serbia and the prime minister of Israel – refused to attend the ceremony in protest of the Russian invasion of Ukraine. The Czech president has described Western sanctions imposed on Russia as "nonsense" and disputed assertions by NATO and Western governments that Russian soldiers are fighting in Ukraine. Zeman told the Russian president: "I’m fully confident that the sanctions are short-term [...] I publicly protested against the sanctions."

One publication wrote: "[Zeman] has been expressing views sympathetic to Russia ever since Russian-backed rebels made it to Donetsk and Lugansk to start waging war. […] Zeman has dismissed the situation in Ukraine as a ‘civil war’ and downplayed the seriousness of the conflict while comparing it to ‘something like a flu’. He has dubbed EU economic sanctions against Russia ‘ineffective’ and ‘stupid’. Zeman said these words, in fluent Russian, on the island of Rhodes, where he was, as the only head of an EU state, a guest at a meeting entitled: Dialogue of Civilizations. The event was organized, and paid for, by Vladimir Yakunin, the chief of Russian railways, a former KGB operative and an oligarch put on the US blacklist after the Russian annexation of Crimea. Zeman counts Yakunin among his ‘long-time friends’ […] The president last month also made comments backing Moscow's line that Ukraine is a hotbed of neo-Nazis. He referred to an internet video he saw from a march on 1 January to commemorate the death of nationalist Stepan Bandera, where people were chanting: ‘Death to Poles, Jews and Communists without mercy.’ The Czech embassy in Kiev later admitted it could not verify the president’s words. His spokesperson has since repeatedly refused to give the source of the president’s information." 

Miloš Zeman has repeatedly criticized publicly BIS’s secret service for overestimating the danger of Russian activities in the Czech Republic and stating that even if such a danger existed, BIS would not be able to fight it. In one of his regular speeches on TV Barrandov, Zeman noted: "I hope I do not disclose any state secrets other than the secret of BIS’s incompetence. In six years, there are no indications that even a single Russian or Chinese spy was detected."

Security experts interpreted his attacks as part of the Castle’s efforts to eliminate the inconvenient BIS chief Michal Koudelka. "I will just mention in passing that we have thwarted the activities of dozens of Russian and Chinese intelligence officers over the past five years, and either did not grant accreditation to these individuals or sent them away in a silent way," Koudelka stated in response to Zeman's criticism. "For example, at the beginning of 2018 […] we had managed to successfully break down the news network of one of the Russian intelligence services operating in our country and thus completely cripple its activities." 

Operations of Czech security forces against Russian intelligence network in the Czech Republic reached their peak at the beginning of 2018 when a group of Russian citizens, including several individuals who had previously acquired Czech citizenship, was detained. The Czech authorities have been monitoring them for several years based on a suspicion that they were Russian spies. The group was operating under the cover of two private companies in Prague. The companies were set up to sell computer hardware and software to ordinary customers and looked like hundreds of other similar businesses. In reality, however, their employees were allegedly engaged in another surreptitious activity: hacking attacks. This group of hackers operating in the Czech Republic was allegedly working with similar cells located in several other countries. The attacks were to be carried out in a coordinated manner, even against targets abroad, and in many places at once to make detection more difficult.

The aim of the Czech police intervention was addressing the potential damage to the Czech infrastructure. After the arrest and interrogation, Russian intelligence officers were told to leave the country. Those who had Czech citizenship stayed there and the police continued to investigate whether they were involved in subversive activities against Czech Republic through alliance with a foreign power. No charges were filed, however.

It is still unclear what exactly were the members of the Russian intelligence network were doing in the Czech Republic and which people or institutions they targeted. But this is not the only unknown in the case. It is also unknown how many people had to leave the Czech Republic in connection with this scandal and how many remained. In December 2016, the New York Times wrote: "In some cases, old ties may be more potent than any website pumping out false stories," said Mr. Randak, the former Czech intelligence chief. He noted that many such personal links existed for more than four decades – i.e., since the time that the Soviet Union controlled Czechoslovakia. "Russian businesspeople, journalists and others have longstanding social or commercial ties here, and some undoubtedly work for Russian intelligence," he said.

Putin’s main goal is to make the European Union collapse: "They want to use the Czech Republic as the country through which they can destroy the European Union. They are active here in a disinformation campaign. Therefore, you will find here Russian disinformation web sites. It is not very clear who is behind some of those web sites. Others are definitely run by Russia. Their main goal is to spread chaos here, and to upset our efforts of rebuilding this country after the ‘velvet revolution.’ They are supporting small populistic extremist parties which are small now but could grow in the future fueled by people’s fear of migrants," said Ondrej Kundra.

Since 1993, 4,764 Russians have been granted citizenship in the Czech Republic. As of 2017, another 38,223 Russian citizens were living in the Czech Republic. As reported by the New York Times, "The Russian Embassy [also] tried to recruit members of the 40,000-strong exile community as agents of influence, setting up the Coordinating Council of the Russian Compatriots in the Czech Republic, according to two Russian leaders of expatriate groups, Alexej N. Kelin, the coordinating council’s former head, and Igor Zolotarev. At first the exiles thought the embassy outreach was to learn how the Czech Republic transitioned away from Communism. "This illusion disappeared at the time when Putin came to power and the whole interest of Russia in its citizens abroad was treating them as a channel to exercise Russian foreign policy abroad," said Mr. Zolotarev, the founder of an expatriate group called Russian Tradition."

However, perhaps nothing emphasized Zeman’s unquestioning support as much as his involvement in the discussion about the origin of the deadly Novichok poison that was used in the UK against former Russian GRU officer Sergei Skripal and his daughter Julia. On 4 May 2018, in an interview with TV Barrandov, Zeman stated that the Novichok nerve agent was produced in a small quantity and tested in the Czech Republic, after which it was destroyed. Zeman claimed to have obtained this information from a Czech military counterintelligence report. He stated that, according to the report, a nervous-paralytic substance denoted as A230 that was produced for testing purposes by the Military Research Institute in Brno was Novichok. Zeman further noted that, while the civilian BIS counterintelligence concluded the gas was not Novichok, he preferred the military counterintelligence’s view. In the interview, Zeman stated: "There is the conclusion that Novichok was produced and tested here, though in a small quantity and then it was destroyed. We know when and we know where it was... It is hypocritical to pretend that this was not so."

After the interview, the Czech defense minister, Karla Slechtova, tweeted that she would not comment on the president’s claims to have based his information about Novichok on a military counterintelligence report, because she only has information on a classified level. She stated that the Czech Republic was exclusively dedicated to the protection of these substances, and if they were tested, they were destroyed immediately after that. "There is no Novichok anywhere on the Czech territory at present." The Czech government, including Prime Minister Andrej Babiš, military experts and the Institute for Nuclear Security previously stated that Novichok had never been produced in the Czech Republic.

Czech journalist Ondrej Soukup stated: "We don’t really understand where he gets information from and with whom he talks. And by the way, people who work in the presidential administration, even at very high levels, do not know this. They don’t really understand how Zeman comes up with any of his ideas." (Conversation in Prague, 9 May 2019)

Another Czech journalist familiar with the matter echoed these observations: "Zeman was lying. He had information that Novichok is not produced in this country. Nevertheless, he said the opposite. He was lying. He got reports from the BIS and from the Army Secret Service. In the report that was made by BIS, it was clearly stated that Novichok was not produced in the Czech Republic. In the report by the Army Secret Service, a few words were mentioned but not that Novichok was produced in the Czech Republic, but that it was produced in small quantities – which was true - for specific scientific purposes. So, they threw Zeman a bone by using this language in their report."

Part 1: Creating the financial basis for Zeman’s political activities

First attempts to pay back the Soviet debt to the Czech Republic

Zeman was no newcomer to politics. He became prime minister of the Czech Republic on 17 July 1998 and remained in office until 15 July 2002. It was during this period that the foundation was laid for Zeman’s future cooperation with the Russian government, which has been led by Putin since 1999. The financial basis for this cooperation was the refinancing of the old Soviet debt to former Czechoslovakia, which was created when the Czech Republic invested in the construction of Russian oil and gas pipelines and refineries. The Czech Republic’s share of that debt in 2000 was US$3.6-3.7 billion. According to the various sources, during the refinancing of this debt, "not only the [current] Czech president, but also other organizers of the deal received their share".

The Kremlin was apparently in no rush to repay the debt because they did not like Václav Havel. The terms of the payment schedule were not followed. Debt refinancing was blocked. By 1993, the negotiations had reached an impasse. The Czech minister of industry and trade, Vladimír Dlouhý, travelled to the Kremlin to deliver the message that Prague was turning over the Russian debt matter to the Paris Creditors Club.

In 1993, Lubomír Soudek, from the socialist-era Czech security services (then called the Státní bezpečnost, or StB) and former co-owner of Skoda, attempted to broker the negotiations over the Russian debt privately. He flew to Moscow several times and expected that an agreement was about to be reached. But the deal was never reached. 

In 1998, the minister of finance of the Czech Republic, Ivo Svoboda, proposed naming as intermediaries for the Russian debt negotiations two Austrian-Israeli businessmen of Russian descent (who were in reality crooks): Shlomo Alon and his son Barak Alon, whose firm BCL Trading in 1996-99 reportedly cheated Czech Komerční Banka of CZK8 billion.

Alon borrowed millions from the bank for fictitious trades with fictitious suppliers all while maintaining personal connections with highly placed government officials, including Ivo Svoboda. He began secretly taking money from Komerční Banka in 1996, when it was run by Richard Salzmann. Komerční Banka’s management was also charged with involvement in the illegal scheme. 

In March 2003 the Austrian court heard their case when Barak Alon was arrested in Hungary (he received an 8-month prison sentence) for defrauding the Hungarian Postal Bank (Magyar Posta Zrt) which went bankrupt as a result. In the Czech Republic, the bank fraud case went to trial in May 2005, albeit without Barak Alon, whose criminal prosecution in the Czech Republic was transferred to Austria, where he disappeared after being released from an Austrian prison.

In addition to the Alon family and Ivo Svoboda, another person who had a hand in resolving the Russian debt problem was František Mrázek, a controversial Czech businessman and a head of Czech organized crime who was assassinated in 2006. In 1999, Mrázek was a member of a Czech delegation that discussed the timing and methods for paying off the Soviet debt at the Hotel Bellvue in Prague. The negotiations were also attended by Zeman’s adviser, Miroslav Šlouf; a lawmaker from the Czech Social Democrat party (ČSSD), Michal Kraus; and by Russia’s then-minister of finance, Mikhail Kasyanov. Together with his good friend, Shlomo Alon, Mrázek then arranged the first meeting of Russian and Czech politicians in Moscow with Yevgeny Primakov, who was Russia’s prime minister from September 1998 to May 1999. These efforts also failed to break the impasse.

A former functionary of the Socialist Youth Union of Czechoslovakia (SSM), Vojtech Slovik, who was Ladislav Zelenka’s commercial partner in the firm International Commodities, which sought to buy the Russian debt from the Czech state on the terms similar to those on which the debt was later acquired by Falkon Capital, recalled this time as follows: "In 1999, I went to my friend Miroslav Šlouf and gave him a plan [to collect the Soviet debt], but then the plan somehow went nowhere." 

Zeman and the debt repayment agreement

On 1 June 2001, Zeman and Kasyanov met in St Petersburg, where they agreed on a plan to sell the Czech Republic’s government debt to a firm called Falkon Capital. The plan was proposed as an ultimatum from the Russians, according to Yan Kovalik from Respekt (The Moscow Times, 25 January 2001).

The Czech government publicly stated that Falkon Capital won a tender for the sale of the debt. However, no documents were ever provided about the terms of the tender or its participants. Zeman also agreed to a second Russian condition that the terms of the agreement for the sale be kept secret. On 9 October 2001, Kasyanov travelled to Prague to sign a debt settlement agreement. An agreement with Falkon Capital was signed two days later, on 11 October 2001. Overall, four secret agreements were signed.

The secrecy of the agreement terms raised questions and caused puzzlement in the Czech Republic. Zeman announced that while the terms of the Russian-Czech agreement were made secret at the request of the Russian side, any parliamentary deputy with the required security clearance could read the agreement. In addition, Falkon Capital insisted on secrecy because the terms of the agreement supposedly constituted a trade secret. Jiří Rusnok, who was then governor of the Czech National Bank, also stated that the matter was a trade secret. However, legal experts believed that it was unlawful to classify the terms of a government agreement with Falkon Capital as a trade secret, as the funds went to the state treasury and the method by which they were received could not – by law – be kept secret, especially since the government could declare something secret only by decree, and the list of secret agreements was required to be published in any case. The Czech-Russian debt agreement was not on that list.

Czech public interest in this matter is legitimate. The deal with Falkon Capital looked out-of-the- ordinary. By paying US$400 million to the Czech treasury, a Prague-based company received the right to collect US$3 billion from the Russian State. The plan was to collect this sum through barter, using electricity supplies from Russian electricity monopoly RAO UES to third countries. A letter from Anatoly Chubais, the chairman of RAO UES’ management board, to Alexei Kudrin, Russia’s minister of finance, of 13 September 2001 indicates that Chubais asked the Ministry of Finance to pay Falkon Capital US$1.3 billion and to compensate RAO UES US$1.35 billion for this. By October, however, the payment scheme had been changed.

Milos Zeman and Mikhail Kasyanov. Photo by ЕРА

On 9 October 2001, during a visit by Mikhail Kasyanov (who was then a Prime Minister of the Russian Federation) to the Czech Republic, the two sides agreed to transfer the Russian debt to Falkon Capital at a 78% discount on a portion of the overall $3.6 billion debt (i.e., receiving $550 million instead of US$2.5 billion). In turn, Russia transferred the US$2.5 billion debt to RAO UES. Further repayments were to be conducted by the two companies, Falkon Capital (the trader through which the Russian holding had previously supplied electricity to Europe) and RAO UES – instea of by the two countries.

Falkon Capital then "transferred" the Russian debt of US$2.5 billion to RAO UES with a discount as well, although officially neither company ever confirmed this information, leaving the public in the dark about who had earned how much on this deal. The only detail known is that the Czech Republic received US$550-580 million, while Russia paid RAO UES RUB40 billion (US$1.35 billion). Russian journalist Oleg Lurye even made reference to Mikhail Kasyanov’s statement in September 2001 that Russia would pay Falkon Capital US$1.35 billion, of which the Czech Republic would receive US$580 million and Falkon Capital US$770 million. 

The US$770-$800 million difference ended up in someone’s pocket: Falkon Capital’s, RAO UES’ or someone else’s. However, there have been repeated assertions both that Falkon Capital received no money from RAO UES for its role in this transaction, and, conversely, that this US$770-$800 difference ended up in an "offshore" account belonging to Falkon Capital.

It is worth emphasizing that the resale of the Soviet debt at a 78% discount took place against the backdrop that Russia had just had settled all Soviet debt with the so-called "Paris Club" without any discounts. According to Yefim Fishteyn, a former director of Radio Free Europe’s Russian service, Falkon Capital was initially a front company chosen for this transaction by then-Prime Minister Zeman, on the one hand, and by the Russian interested parties, on the other. On behalf of the Russian government, the authority of Falkon Capital was confirmed by Petr Aven. But if the Russian individuals involved in the deal received their remuneration in the monetary format, Zeman received it in the format of power: his Presidency in 2013 became the compensation paid by Russia for writing down the old Soviet debt at a 78% discount.

Some of the details of the Russian-Czech deal were picked up by the media. On 23 November 2001, the Russian publication Vedomosti wrote:

"This scheme involved the Ministries of Finance of Russia and the Czech Republic, as well as RAO UES and Falkon. Falkon received from the Czech Ministry of Finance the right to demand US$2.5 billion by proposing to buy Russia’s debt for US$580 million. Russia’s Ministry of Finance transferred its obligations to RAO, while Falkon agreed to write off US$1.15 billion of this sum and make its demands for the remaining US$1.35 billion only from RAO and not from the government. After this, a Czech firm takes a loan to pay US$580 million to the Czech government and RAO compensates Falkon’s expenses, including interest on the loan (it settles the remaining US$770 million in the form of electricity supplies for Falkon). In turn, before the end of the year, RAO would receive RUB40 billion from the federal budget to settle its and its subsidiaries’ debt with the creditors – Gazprom, Rosenergoatom and various coal producers. These funds, via accounts of RAO and creditors, would make their way back to the budget – to settle the arrears for these companies." 

Indeed, on 10 December 2001, Sberbank and RAO UES concluded a loan agreement whereby the Sberbank lent RAO RUB24 billion (around US$800 million, or 12.4% of the value of RAO’s assets) for two years. After the meeting, David Hern, a member of RAO’s board of directors, explained that the loan was used to buy Russia’s debt of US$1.35 billion from Falkon Capital.

RAO UES transferred the funds to Falkon Capital a week after receiving the loan, on 17 December 2001. It is not clear exactly how much of that amount was received by Falkon Capital. In late 2001, sources in RAO UES’ management announced that Falkon Capital had received close to US$550 million, which is the amount for which the Czech Republic sold the Russian debt to them. If so, Falkon Capital’s "margin" was US$250 million, while RAO UES earned US$550 million, albeit without receiving this in cash: they simply got this amount as a debt forgiveness for itself and its subsidiaries, regional energy companies, to the government and suppliers: Gazprom, Rosenergoatom and coal producers.

To this day, Czech and Russian media outlets describe this deal as corrupt. In addition, Czech intelligence services investigated this deal (the results of this investigation were never published). In particular, it was absolutely unclear from where Falkon Capital obtained the initial CZK20 billion for buying the Russian debt.

Back in February 2002 in Russia, the communist members of the Russian Parliament requested that the Russian Audit Chamber review the deal for "legality and feasibility." Specifically, they were not clear of the role in the deal played by the Centre for Facilitating Energy Reforms (Russian abbreviation: TsSRE), a non-profit partnership, established by two RAO UES subsidiaries. Most importantly, it was unclear where the difference had ended up between the US$1.35 billion and US$550 million that the Czech Republic had received from the TsSRE via Falkon Capital, and where the US$800 million had gone.

In December 2001, Russia’s Ministry of Finance had transferred to RAO UES its obligations to settle Russia’s debt to the Czech Republic and undertook to compensate RAO UES for the debt settled. To buy the debt, RAO UES issues RUB40.743 billion in promissory notes and transferred them to Falkon Capital, which acted as an agent for the Czech Republic in the transaction. RAO UES then redeemed the promissory notes in several tranches, albeit at a significant discount. The payments were conducted using the TsTRE as an intermediary. As mentioned, its founders were two wholly owned subsidiaries of RAO UES: Centre for Optimization and UES Payments, and Yurenergo UES.

At the same time, under its agreement with Russia’s Ministry of Finance, RAO UES extended interest-free loans to its largest suppliers – Gazprom, Rosenergoatom and to two of its subsidiaries – for RUB14.705 billion and RUB26.044 billion. The loans to the subsidiaries were made through TsTRE and then transferred to RAO UES. Using these funds, the subsidiaries cleared their debts to RAO UES’ main suppliers, while Gazprom and Rosenergoatom, in turn, repaid their obligations to the government. After the Ministry of Finance received confirmation of repayment of the Russian debt and of the settlement of the obligations of RAO UES’ suppliers to the goverment, RUB40.713 billion was transferred to RAO UES.

As the deal involving Falkon Capital was intergovernmental, it could not have been concluded without approval from then-Prime Minister Zeman. One direct lobbyist for the deal in the Czech Ministry of Finance was Zdeněk Rachač, a former advisor to Václav Klaus. Czechoslovakia’s Minister of Finance in the early 1990s, Klaus was also a Chairman of the House of Deputies in the Czech Parliament from 1998 to 2002 and the Czech President from 2003 to 2013, before Zeman.

In mid-April 2002, the then-Prime Minister Zeman visited Russia to negotiate the repayment of the remaining US$1.1 billion of Soviet debt. Based on an agreement between the two countries, the sum of US$200 million was to be covered by the supplies of Russian nuclear fuel, and "among the contenders to cover the remaining US$900 million that the Russian government was to return to the Czech Republic", as one Russian article stated, "weapons manufacturers and shipbuilders dominated," particularly since Rosoboronexport had previously taken part in "settling Russian debt." 

As Finansoviye Izvestiya wrote in late 2003: "Deputy Finance Minister Ladislav Zelinka has clarified that this time, the debt would be bought for a sum approaching 35% of the Russian debt. Zelinka refused to comment on the transactional mechanics between Moscow and Falkon Capital: "We know nothing about this: it is a Russian internal matter. If they want to inform us, they will say so. If not, we might never know". If Russia and Falkon get along, the only part of the Russian debt US$3.6 billion remaining would be the part allocated to the Ministry of Defense." 

Ladislav Zelinka, a Deputy Finance Minister since 2000, who was responsible for selling the Russian debt on behalf of the Czech Ministry of Finance, resigned in 2005 after a public revelation was made of a scheme regarding the sale of another government debt – from Peru.

In addition, to settle another portion of the debt, Russia was also considering renewing the ‘technical military cooperation’ with the Czech Republic, an arrangement that has been dead for over 10 years by then. After the collapse of the Warsaw Pact organization in 1991, Czechoslovakia had even exchanged completely modern MiG-29s for helicopters. Now, as part of an intergovernmental agreement regarding the ‘technical military cooperation’ signed on 16 April 2002, Russia undertook to supply to the Czech Republic spare parts and to repair Soviet-produced weapons for the value of US$20-30 million. The Czech side also planned to purchase seven Mi-24 assault helicopters for about US$300-400 million.

On 11 February 2002, Leonid Melamed, then First Deputy Chairman of RAO UES management board, gave a vague account of the events surrounding the settlement of the debt in his interview with the Russian newspaper Vedomosti, leaving many questions unanswered:

– Who would have given it to them? […] We bought the debt from Falkon for the price that made the transaction attractive. So, for US$800 million that was borrowed from Sberbank in December 2001?

– In December, we took loans for the amount similar to the one you mention, but where did you get the idea that we used those funds to pay Falkon and that we paid exactly US$800 million?

– David Hern, a member of the board of directors of your company, had recently told us as much, stating exactly this figure – US$800 million. Are you trying to say that Falkon received less?

– I would state it differently: Falkon received more than US$550 million. The company unlikely would have agreed to work for free. But there are rumors that part of Falkon’s margin will go toward financing Czech government programs. However, this is really none of our business. […] The funds transferred to Falkon, as you understand, are fungible. If you are asking whether RAO received loans totaling about US$800 million at the beginning of December, I would say ‘yes’. However, I do not have the right to disclose the specific parameters of agreements with lending organizations […].

– Is it the case that in the first stage of repayment, you paid the debt using assets with the value of US$1.35 billion and then bought them from Falkon for much less?

– We paid the debt using RAO UES’ own promissory notes. That is, we deposited them in a Russian bank and then bought them back right away. The notes did not even cross the country borders. .

Nota Bene: Leonid Melamed was arrested in his apartment in Moscow on 1 July 2015 by the officials from the main investigative department of the Investigative Committee of the Russian Federation as part of a criminal investigation into the alleged misappropriation or embezzlement of around RUB300 million. He was officially charged with misappropriation or embezzlement (Article 160 of the Russian Criminal Code). One of the triggers for the investigation was the report from audit conducted by the Audit Chamber of the Russian Federation in 2013. Melamed remained under house arrest until 11 May 2017 (or 21 February 2018, according to some sources).

Falkon Capital

Falkon Capital was established in Prague on 28 November 1995 with an initial capital of CZK2.5 million (less than US$70,000), by several individuals from the former Soviet Union. Its founders included Panteleimon (Paata, Paat, Paato, Paatou) Mamaladze, Inga Mamaladze, Vazha Kiknavelidze, Aristarkh (Aristakes) Alaverdyan (a citizen of Armenia) and several other individuals.

Around the same time, two weeks before the company was set up, on 10 November 1995, the firm Falkon GmbH was registered in Switzerland with an initial capital of CHF2 million by Paata Mamaladze and Teimoraz Kachkachishvili.

The general view is that Paata Mamaladze was a former GRU officer who had lived in the Czech Republic since the late 1980s. "The KGB got him planted and in the early 1990s, he was one of the organizers of the arrival of the first Russian gangs," recalled one BIS employee. https://kostlanova.blog.idnes.cz/blog.aspx?c=469324 Citing information from the Czech Police Department’s organized crime unit, the journalist Yan Kovalik (Respekt) also reported that Mamaladze was a GRU agent and that another co-founder of Falkon was under investigation by a special unit of the Czech Police Department (The Moscow Times, 25 January 2001).

On 12 November 2001, the website earthtimes.org published an article by a New York journalist named Lucy Komisar stating that the Swiss front-company Torola that was registered in Lugano and engaged in arms trading, was maintaining contact with a Russian firm, and that one of the owners of Torola (which means "Skylark" in Georgian) is a Georgian arms dealer and a former GRU officer Paata Gurmovich Mamaladze. Another co-owner of Torola mentioned was Zeev Ofer, an Israeli citizen of Russian origin, who was also a co-owner of Falkon Capital as of 2001. His given address was the same as Paata Mamaladze’s.

Falkon Capital’s business profile was recovering the Czech debt. Its first attempt, which was unsuccessful, focused on Libya’s debt to the Czech Republic. In 1989, a German citizen named Georg Brozhichek had tried to secure repayment of the Libyan debt. On 15 June 1996, he was thrown out of the window of his apartment in Switzerland. According to the official version, he fell from the window "due to mysterious circumstances". A year later, Falkon Capital attempted to buy the Libyan debt of US$270 million from the Czech government. The debt originated after Colonel Gaddafi purchased from Czechoslovakia on credit some military equipment during the Soviet era.

"An agreement for the resale of debt to Falkon Capital" had already been prepared by the then-then Czech Finance Minister Ivan Pilip. However, in April 1998, one of the departments of the Ministry of Finance that was authorized to collect that debt refused to sign the agreement with Falkon Capital based on the recommendation of the Security Information Service (BIS). This was due to BIS’ information that both of Falkon’s representatives – i.e., Mamaladze and Kiknavеlidze – were former officers of GRU with the network in the criminal world. They had been under BIS’ surveillance since 1993. The Czech Police’s organized crime unit also took an interest in them later.

After Pilip refused to cooperate with the "Czech" Falkon Capital due to its owners’ past being linked to either the GRU or the Russian mafia, on 7 February 1997, the original Georgian and Armenian founders formally left the company, and Falkon Capital was re-registered as a "Czech-Swiss" firm, having sold 95% of its shares to a Swiss entity called Magchim. Nevertheless, the representatives of the Mamaladze family remained in the management: Panteleymon, Sergio and David Mamaladze (who was born in 1986).   

As of April 1998, the individuals whom the BIS suspected of being GRU operatives were no longer featured in Falkon Capital’s charter documents. In their place, the documents listed brothers Hans Peter Moser (born in 1955) and Beat Urs Moser (born in 1958) from Switzerland, to whom 95% of the shares of Falkon Capital had been formally transferred. At least, that is the information that was provided by Falkon Capital’s new head and the chairman of its board of directors, Iosef Chimbor, a Slovak and a former head of the Slovakian oil company Slovnaft, who had studied previously at the Oil and Gas Institute in Moscow. Until 1999, he was a member of the board of directors at OIL-SL where three of his partners were killed in 1996: one in Žilina, the other one in Prague and the third one – in Vienna.

According to Frantishek Bublan who was a priest during the Soviet times and a minister of internal affairs and intelligence chief after the Czech revolution of 1989, Falkon Capital was run by front people who could not be contacted, as their given addresses were fictitious. "All ministers had intelligence information that the firm was fictitious," Bublan said, "but they supported not only the sale [of the debt], but also the Mafia method of selling it."

Indeed, it was not possible to reach anyone at the address given for the firm. Journalists tried. It was an empty room that a Dominican Catholic Order had rented to Falkon Capital. The members of the Order confirmed that someone would occasionally stop by there to collect mail. The building concierge suggested that the firm had an administrative office about half a kilometer away. A lady answered the door there, saying with a heavy Russian accent that her boss Chimbor "would not be in today."

Even more shocking was a visit to the firm’s Swiss owner. Magchim had a rented administrative office on the outskirts of Neuhausen in a run-down industrial zone, in a trailer structure made of shipping containers with not even a secretary. At the desk sat Beat Mozer, who was extremely surprised by the visit and refused to speak about anything having to do with the Russian debt.

Schafhauser Nachrichten, a regional newspaper, had never heard of the Mozer brothers or their firm. Zelinka admitted to journalists that he had never seen the Swiss owners and always met with Paata Mamaladze, who was authorized speak on behalf of Falkon Capital (Respekt, 29 October 2001).

This fictitions firm was the one that, based on a decision by the Russian and Czech governments, had been tasked with settling billions of dollars of Soviet debt. On 28 December, Vedomosti summarized the deal as follows:

"Yesterday, presumably the largest and the most mysterios deal of the year was concluded. It is clear now that behind the Prague company Falkon, which bought Russia’s US$2.5 billion debt to the Czech Republic for 22% of its nominal value, stood its Russian partner – RAO UES. Through a multi-step combination, RAO settled a RUB40 billion (US$1.35 billion) debt to the government for just US$550 million. Truth be told, the government did not end up in the "red" since it got rid of a US$2.5 billion debt to the Czech Republic." Simultaneously, "RAO UES settled with Falkon Capital in full by buying from it the right to collect the Russian debt to the Czech Republic. Russia’s obligations on that debt were also transferred to RAO UES. The difference between these two amounts, or US$770 million, was the energy holding’s net profit from taking part in the intergovernmental deal.

The settlement of the Soviet debt to the Czech Republic of US$2.5 billion had thus come to a logical conclusion. In accordance with an agreement signed on 9 October in Prague, the debt was discounted by 46%. Yesterday, the Finance Ministry wrote off the remaining US$1.35 billion, or RUB40 billion of RAO UES’ debt to the government. In addition, Anatoly Chubais’ company assumed the government’s obligations of US$1.35 billion to the Prague company Falkon Capital, which bought the Soviet debt in June at a tender by the Czech Finance Ministry. RAO UES paid Falkon Capital US$550 million on 17 December, and by 19 December, the Czech company, having transferred this amount to the Czech fisc, became the full-fledged holder of the Russian debt."

Therefore, according to the calculations by the Russian and Czech media, the Russian side had allocated US$1.35 billion to pay the Czech debt, while the Czech side had received either US$550 million or US$570 million. And it remained entirely unclear where the US$770-800 million difference had gone.

Payment of Slovakia’s Soviet debt

In August 2002, using an analogous scheme, Slovakia’s Soviet debt for a total amount of US$1.112 billion was restructured. The hitherto unknown Prague company Fid Group, with a charter capital of CZK2 million (US$64,000), without a tender, was authorized by the Slovak Ministry of Finance to settle a portion of the Russian debt in the amount of US$460 million, which was reassigned by Slovakia to Fid Group for 27-31% of its nominal valuet, that is for US$135-140 million.

It remains unclear why would the Slovak government have chosen Fid Group for the task. Despite a 2000 decree (No. 519), the government of Slovakia did not conduct a tender. Fid Group was appointed as the authorized party for the deal by a unilateral decision of the Slovak Ministry of Finance State Secretary Vladimir Podstransky. In fact, the Slovak Minister of Justice, Ján Čarnogurský said that according to his intel, "Fid Group was recommended by the Russian side."

Čarnogurský himself was against this approach to settling the debt since, according to his knowlege, Fid Group had previously violated "its obligations in the trading operations in the Czech Republic involving significant amounts [of money]." But the representatives of the Russian VEB bank, while refusing to comment on the details of the deal, made it clear that the Russian government is backing the Prague-based Fid Group: "Without the approval of the Russian government, they would not have been able to engage in such an operation."

The chairman of the board of directors of Fid Group was a 25-year-old Daniel Farnbauer. The chairman of the supervisory board was Miroslav Čokola; the members of the supervisory board were Imrich Farnbauer and Lucy Farnabauerova. The shareholder was Hana Farnbauerova. In other words, this was a small family business that had not followed any of the standard regulatory requirements for setting up its business operations and that was engaged in large-scale intergovernmental finance deals.

Testimony of Vladislav Moskalev

It is often hard to find witnesses to the corruption schemes at the highest levels: no one wants to admit that they committed crimes: took bribes, paid kickbacks... Moreover, much time has passed and the participants in the 2002 deal had since risen high up in the bureaucratic hierarchy. Some even became presidents. Therefore, let’s consider the memoirs of one of the witnesses of those events, a businessman named Vladislav Moskalev who was originally discovered and contacted for an interview by the famous Russian journalist Anastasia Kirilenko. Moskalev currently resides in Canada (which has refused to honor a Russian extradition request), but back then, in 1999, he was at the epicenter of the relevant events in Russia.

During the 1990s, Moskalev was a member of the Bolshaya Shlyapa ("Big Hat") tennis club that held tournaments, in which the members of the government and big businessmen participated. The organizer of the club, a banker named Yaroslav Kalagursky, introduced Moskalev Paata Mamaladze, the founder of the Czech company in question, Falkon Capital. "The foreign debt was always attractive for businesspeople. The discounts could range from 10% to 80%," explained Moskalev. For Mamaladze this was not the first attempt to obtain the foreign debt held by the Czech Republic. Previously, he unsuccessfully attempted to broker the settlement of the Libyan debt to the Czech Republic. "And when Kalagursky recalled that Mamalzade led this scheme on behalf of the Czech Ministry of Finance, I started listening."

According to Moskalev, many businesspeople were hovering around the Czech debt, but the proposals to pay off the debt through the supply of timber and oil were rejected. "From my side, we proposed to pay off the external debt of Russia to the Czech Republic through the supplies of electricity, although in Czech Republic already enjoyed an oversupply of its own electrical power. My friend Oleg Sysuev, who at the time had only just left the Office of the President, organized a meeting for me with the then-minister of finance, Mikhail Kasyanov. Sysuev and I come by to see Kasyanov. ‘What have you guys got?’ – he inquires, smiling in a friendly manner. I tell him: ‘Czech Republic’s foreign debt that I am offering to settle.’ He says, ‘So, how do you propose to do that?’ I reply, ‘With electric energy supplies.’ Kasyanov was the first person who became interested immediately and did not ask some silly questions along the lines of ‘Why would the Czech Republic need electric energy?’. Instead, after a five-minute conversation, he said, ‘Ok, let’s try it.’ He asked me to arrange for a letter from RAO UES expressing its ‘interest in participating in a plan to settle the Czech debt with the electric energy supplies’. Notably, this terminology does not specify where the supplies would be made since when the deal commenced, the supplies were to Belorussia and Ukraine."

Владислав Москалев. Video screenshot: Oleg B. / YouTube

Kasyanov asked for the letter to look "more "official", on two pages" because it would have to be included in correspondence with the Czech Ministry of Finance. However, it did not turn out to be possible to get this letter.

"Two people had signature rights at RAO UES – Chubais and Alexei Kudrin, who at the time was a Chubais’ finance deputy at RAO UES Russia. Sysuev was not able to help me get to Kudrin who was constantly busy. I managed to get to him through Alfred Koch since we knew some people in common. Sysuev asked Koch to set up the meeting. Koch was no longer working for the government at that time but instead was involved in some fund together with his friend Arkady Yevstafiev in Gazetny Lane – which is where I met with Koch. We then went to RAO UES together, which was located in China Town at that time. Koch and Yevstafiev went to Kudrin’s office and I waited in the hallway. So as to make things easier, we wrote the letter in advance.

After 20 minutes, Koch and Yevstafiev came out from the office, looking defeated. ‘He did not sign.’ ‘Why not?’ ‘He said that he knows nothing about this stuff.’ Notably, Kudrin became the minister of finance! I tell them: ‘Please ask Kudrin’s secretary to type up just one sentence: ‘RAO UES of Russia is interested in participating in the settling of Russian Federation’s foreign debt in favor of the Czech Republic in the amount of US$3 billion.’ What if he signes this? Well, they went back to his office and after a couple of minutes, came out, saying: ‘Yes, he signed.’ So, I go back to the ministry of finance, Kasyanov sees me and asks: ‘Do you have the letter?’ ‘Yes.’ ‘Let’s have a look.’ Kasyanov reads the letter, says nothing but smiles broadly. Czech’s ministry of finance was notified that there was a new way of possibly settling Russia’s debt. The next step was to sign an agreement between RAO UES and the firm that was authorized to act on behalf of the Czech ministry of finance in this matter – namely, Falkon Capital."

According to Moskalev, although Josef Cimbora signed the Falkon Capital documents, in reality Paata Mamaladze was behind this. "When Mamaladze realized that the deal might go through, he, finally, opened an office, which had not been there before, since the firm did not have an office. In a month or two, they prepared the contract, but by this time Kudrin had become the minister of finance and Kasyanov became the prime minister. Kudrin’s place at RAO UES was taken by another deputy of Chubais for finance, Anatoly Zelinsky. For around a week we were discussing the contract. I insisted that RAO UES receive an advance of US$5 million from the Ministry of Finance. Zelinsky reported to Chubais and the latter told him: ‘Get to work’. After our fourth or fifth meeting, Zelinsky said: ‘I will sign it tomorrow at 10am’ and I reassured Mamaladze. But on the next day he says: ‘I am not signing, I am afraid’. I could hardly believe it! I was trying to convince him for two hours. He finally signed in silence and then said: ‘I am simply tired, let’s just see what happens.’"

Moskalev recalls that he then handed the signed contract over to Mamaladze and the next day it was registered in the Czech Ministry of Finance. "Six to eight months after all of the negotiations began, the payments have finally started. During this time, RAO UES found a party to implement a deal from inside its own organization - Inter-RAO. When the deal was signed, Inter-RAO had one office in the Morskoi House near the Moscow City Duma. Mamaladze personally never came to Russia but his people did and were initially surprised at how such a major deal was being handled by such a small firm, to which I replied: ‘And look at yourself’". Indeed, Falkon Capital’s website did not even list a telephone number or an email.

Compensation of the participants in the deal "carving up" the Soviet debt, the beginning of political cooperation of people participating in the debt settlement

After Moskalev did all of the initial work, he was simply "dumped":

"A year later, Zelinsky left and Leonid Melamed came in his place and picked up the Czech deal. Melamed did not need me since, in contrast to the others, he already allocated the money. As a result, they simply got rid of me: there was "compensation" from Mamaladze, but it was evidently from his own money, that was enough to go to a restaurant a few times. It was absolutely not what we had agreed to, but I understood the risk that I could be easily gotten rid of since no documents contained my signature […] It was useless to be upset over it. By this point, Sysuev no longer worked in the Presidential Administration and was at Alfa Bank, and there was no one to speak up for me. […] Zelinsky, after the contract was signed, called me several days later, out of the blue, and said: ‘Slava, [we] need the money. [It’s] Chubais [who] is asking.’ I found it funny – these things are usually negotiated upfront. Moreover, it was clear that this was just for him personally, as the amount was small, around US$150,000, and there was no advance payment made on the deal as of yet from the Ministry of Finance. I had to explain to him that RAO UES, as a commercial enterprise, could execute an official contract with a third party for consulting services in finding the partners to pay off the debt (i.e. Falkon Capital). As a result, emerged Agency Agreement No. 1-ChR dated 22 July 1999".

Article 4 of the Agency Agreement stated as follows: "The Principal [RAO UES] must pay to the Agent [Yucom-Libero] a compensation in the amount of 3% of the total amount received from the Ministry of Finance of the Russian Federation in consideration for the supplies."

The catalogue of the tasks completed by Yucom-Libero contained the mention of them having undertaken "negotiations with the Czech side – the Ministry of Finance of the Czech Republic and the authorized representative Falkon Capital – with respect to the agreement to accept electric energy supplies as payment for the foreign debt of the Russian Federation; preparation for, and participation in, the signing of an agreement between RAO UES Russia and the authorized representative Falkon Capital, which is reflected by the fact of the execution of the said Agreement dated 28 July 1999, No. 1017/1755."

As noted by Moskalev, Anatoly Zelinsky received a bonus based on this agreement "only once", in the amount of US$144,000. Moskalev was convinced that Kudrin did not hold any grudges: "Once I accompanied Zelinsky to Prague, and then he brought Kudrin there. Zelinsky had a small share [of the deal], Kudrin had a large share [of the deal]. I do not have any documents on this subject, as they quickly removed me from this deal, but people from Inter-RAO told me about this. Zelinsky was paid for the fact that he introduced Kudrin with Falkon. Nobody paid anything to Kasyanov."

The deals with Falkon Capital for the remaining share of the debt continued after Mikhail Kasyanov’s departure from the post of prime minister, "when only a selected number of officials on the inside knew what the Czech debt was." According to Moskalev, in the end, "a minimum of around US$2 billion went to payments for discounts" and the remaining US$1 billion went to the supplies of electrical energy to Belarus and Ukraine: "the Ministry of Finance paid Falkon US$1.15 billion and everyone knew that the Czech treasury received only US$400 million. The remaining US$700 million had already been distributed among the participants: everyone had a share, Melamed and Chubais. According to my source, an employee of Malmazade, Chubais gave a portion of the money from the discount to Zeman. It was not only in the form of cashless transfers, but also in cash. It was then that Zeman, evidently, was ‘hooked’."

In July 2001, Josef Cimbora filed a police report in Prague stating that he had lost a suitcase. The suitcase was found. It contained US$180,000. Cimbora was not able to explain what the money was for and why he had it.

Right before Christmas 2001, Falkon Capital transferred US$570 million to the account of the Prague branch of Deutsche Bank. The wire transfer was converted into Czech koruna and then, in turn, transferred to an account of the Czech National Bank. The final payment of US$19,000 was received by the Czech Ministry of Finance from Falkon Capital in the summer of 2012.

Putin was informed about this deal as an allegedly corrupt one with a proposal to punish those responsible. He gave the nod to Kasyanov. Kasyanov elected not to punish Kudrin, his own minister of finance. But, as Moskalev recalled, "sometime in 2005, a mid-ranking FSB officer visited me. He wanted compromising information regarding Anatoly Chubais in connection with the Czech deal."

In this context, the declaration of Anatoly Chubais about an article by Klaus about Ukraine is understood quite differently. Chubais issued two tweets in 2014 concerning Klaus and his Ukrainian position: "My old comrade, Václav Klaus – the former Czech President – sent me a link to his article about Ukraine"; "Probably not everyone will agree with him; but you cannot accuse him of being superficial or biased. I read it. The article is very interesting. Read it!"

In this ‘unbiased’ article, Klaus claims, among other things, that "contemporary Ukraine is the sad legacy of Stalin’s mixing of peoples and borders", which "completely lacks the historical tradition of its own statehood." He called the Euromaidan "the Kyiv putsch" and predicted Ukraine’s breakup. In January 2015, soon after the annexation of Crimea and Russia’s invasion of Eastern Ukraine, Klaus announced that Ukraine should repeat "the good experience of the division of Czechoslovakia" into Czech Republic and Slovakia, that Russia is not fighting in Ukraine, that Ukraine has not managed to be a "state", and that Crimea has always been a part of Russia: "It is quite clear that Crimea was not part of Ukraine, and you know it. Crimea has always belonged to Russia," Klaus stated, after which he was expelled from Washington’s Cato Institute. 

Anatoly Chubais and Václav Klaus. Photo by theins.ru

Klaus has been one of Putin's most loyal defenders for many years, refusing to put any blame on Russia for the 2008 war against Georgia. He also compared the European Union to the USSR and called global warming a "religion", not a science. Lukoil underwrote the Russian-language publication of his anti-global warming book, and he has been awarded the Pushkin medal by Putin personally. According to Ondrej Soukup, Klaus is friendly with Lukoil owner Vagit Alekperov.

Zeman, who met with Putin in Sochi in November 2017, announced that: "Ukraine does not remember its own history", while the Czech Republic needs Russia more than it needs EU. He did not rule out a possibility of holding a referendum for the Czech Republic to leave the EU and NATO, and called the annexation of Crimea by Russia a "fait accompli" and a "restoration of historical justice," http://uacrisis.org/38646-chech while advising Ukraine to think about "financial compensation or compensation in the form of oil and gas supplies." Zeman also demanded the cessation of the sanctions by the EU against Russia which were implemented after the invasion of Ukraine, indicating that the sanctions against Russian need to end already since Czech businesspeople want to establish economic ties with their Eastern neighbor and promote their interests in the region. "I spoke with Lavrov, and he indicated that there were no Russian soldiers there [in the Ukraine.] There is no proof of the Russian presence in Donbass," Zeman announced to the journalists. "We provide monthly detailed reports to Zeman," responded Czech intelligence services, hinting that Zeman could not have been unaware of the Russian invasion of Ukraine.

In June 2017, the Czech Republic refused to accept migrants in accordance with the quota of European organization, thus provoking multiple speculations, including the possibility of it leaving the EU. Zeman’s words that over the long term, "the European Union will become a member of the Russian Federation" had also provoked a powerful public reaction in the Czech Republic.

Settling the Czech and then the Slovak Soviet debt created a whole group of participants and sectors in 2002-2003, built on the completely fantastic (for this time) free money, which appeared in circulation. All the participants in the deal advanced up the career ladder. The hitherto totally unknown firm Falkon Capital became an international enterprise, which was now engaged in various large-scale projects despite its poor reputation, suspicions of participating in shady deals, corruption, and ties with criminal element and with the security services.

Russia’s military-industrial complex was formally involved in the payment of the remainder of the Russian debt, and this allowed the Russians to partner with the arm and munition producers in the former Czechoslovakia. This is the time when the future Czechoslovak Group (CSG), founded by Czech businessman Jaroslav Strnad, was founded and began its rise.

To be continued.

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