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. Last Updated: 07/27/2016

Chukotka Audit Finds Mass Irregularities

The Audit Chamber on Friday unveiled a damning report of "mass" financial abuse by Roman Abramovich's government in Chukotka -- and then grudgingly praised the tycoon for making life better for the 50,000 people who inhabit the remote Arctic region.

In its highly anticipated probe of the region's finances, the budget watchdog found that the richest free man in Russia awarded massive tax breaks to firms linked to his oil company Sibneft; illegally spent more than 1 billion rubles; presided over "mass" legal violations, and ran up the bankrupt region's debt to 9.3 billion rubles.

"[We found] mass violations of financial discipline, budget and tax legislation," auditor Sergei Ryabukhin told a packed news conference.

Auditors found that in the past three years, 12 billion rubles ($470 million) in profit and property tax breaks were awarded to 22 trading companies registered in Chukotka, many of which had one or two employees and no business activities in the region.

"Most of the tax breaks were given to enterprises that participated in financial transactions for large companies, first of all Sibneft," Ryabukhin said.

Auditors also found that roughly 1.5 billion rubles of budget funds were misused in 2003 alone, mostly "due to the government of Chukotka not observing the requirements of budget legislation and systematic mistakes," he said.

Ryabukhin said the chamber had forwarded its report to the prime minister, the Finance Ministry and the Prosecutor General's Office, although he went out of his way to stress that the audit was routine in nature and should not be linked to Kremlin calls for businesses to be more socially responsible.

"It was a professional, competent and thorough analysis," Ryabukhin said. "There was no bias."

Indeed, Ryabukhin downplayed the findings, saying that most of "illegally redirected" funds were spent on salaries for teachers and doctors, healthcare, construction projects, culture, education and sporting activities.

When asked by a Chukotka television crew if life had improved in the region since Abramovich was elected in 2001, he said: "Of course."

Audit Chamber chief Sergei Stepashin, however, said Sunday that judging from the results of the audit, Abramovich is "very much letting down the president of Russia" and called for him to step down as governor.

"He's a good guy, but he shouldn't continue to hold the post of Chukotka governor," Stepashin told Interfax. "He has a hobby, soccer, so let him continue to deal with that. But one shouldn't conduct experiments on the region and people."

As far as the 12 billion rubles in tax breaks are concerned, Ryabukhin said that those companies that received them fulfilled their obligations under Chukotka law to reinvest at least half of that amount in local development projects.

Still, this money technically came from the budget, not the companies themselves, he said. "This is a serious problem, which on the whole does damage to the consolidated budget of the country."

Abramovich's administration issued a statement, highlighting what it said was the "basic conclusions" made by the Audit Chamber -- that there are no criminal cases to be brought as a result of the inspection."

Since the October arrest of Abramovich's erstwhile merger partner, Yukos billionaire Mikhail Khodorkovsky, Moscow has been abuzz with speculation on who might be next.

Analysts said that if the Kremlin were intent on launching a wide-scale assault on the oligarchs, Abramovich, with an estimated fortune of $12 billion and a taste for British soccer clubs, would be a likely target. But by publicizing what could be grounds for prosecution and then minimizing them, they said the government appears to be indicating that the Yukos affair is an isolated event -- as long as it gets what it wants, unrivaled power and more revenues.

Chris Weafer, chief strategist at Alfa Bank, said Abramovich will have to pay a tribute for being let off the hook.

"Sibneft and [its parent company] Millhouse know what to do to get out of trouble," Weafer said. "Millhouse will be expected to pay an additional sum of $1.5 billion to reflect what was the true value of oil assets they bought under [former President Boris] Yeltsin, while Sibneft itself will have to come to an agreement with tax authorities to cover back taxes."

Tax authorities have already accused Sibneft of avoiding $1.4 billion in taxes.

"Abramovich was doing in Chukotka exactly what Yukos is now coming to grief for, which is taking advantage of offshore and onshore tax schemes," said Eric Kraus of Sovlink.

"But I don't think Abramovich will share the fate of his friend [Khodorkovsky] because he had the intelligence not to attempt to buy the State Duma or get in the way of the Russian government," Kraus said.

James Fenkner of Troika Dialog said that some people in the government may want to go after Abramovich, but they don't have the upper hand -- at least for now.

The British newspaper The Independent reported Sunday, citing unnamed sources, that the Audit Chamber is continuing its investigation of Abramovich.

Specifically, the paper said the chamber is examining whether he had a financial interest in the sale of Chukotka's Maiskoye gold field last year, and whether budget funds were used to seal the deal.

Deerfield Universal, a Russian company reportedly controlled by Abramovich, sold the mine in September to Britain's Highland Gold for $35 million.

Neither Deerfield nor Highland could be reached for comment Sunday, and the Audit Chamber made no mention of the deal Friday.