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. Last Updated: 07/27/2016

Deputy Finance Minister Arrested

bloombergSergei Storchak
Investigators arrested Deputy Finance Minister Sergei Storchak on suspicion of belonging to a criminal ring that sought to embezzle tens of millions of dollars in state funds, the Investigative Committee, which operates under the Prosecutor General's Office, said Saturday.

Storchak, a close aide to Finance Minister Alexei Kudrin, is the country's top debt negotiator and oversees the $148 billion oil stabilization fund.

The high-profile arrest comes as Prime Minister Viktor Zubkov, considered a top contender to succeed President Vladimir Putin, steps up rhetoric against corruption ahead of next month's State Duma elections and the presidential vote in March.

Storchak was detained Thursday, as Kudrin flew to South Africa to attend a meeting of finance ministers from the 20 most industrialized emerging economies. Moscow's Basmanny District Court approved the arrest Friday, Interfax said.

In South Africa, Kudrin defended his deputy and urged a fair investigation.

Storchak was held along with a businessman and a bank director "on suspicion of attempting to embezzle large sums from the state budget," said Vladimir Markin, spokesman for the Investigative Committee, an agency formally under the auspices of the Prosecutor General's office, Russian news agencies reported.

Markin cited the two other detained men only by first initial and last name -- V. Zakharov, general director of Sodexim, and V. Volkov, the president of Interregional Investment Bank, or MIB.

Several sources said more arrests were likely.

Storchak's arrest was linked to irregularities in the state's repayment of Soviet-era debt to Sodexim, an unidentified Finance Ministry source told Russian news agencies on Sunday. Law enforcement authorities suspect that the size of the state's liabilities to the company may have been miscalculated, the source said.

"Storchak was detained because he was signing all [the debt-related documents]. A number of banks are involved ... and people in the government administration," a source close to the investigation told Reuters.

The investigation may also be linked to Iraq's repayment of debt to Russia, Reuters cited the source as saying. Russia has forgiven most of Iraq's debt, but Storchak was negotiating the repayment of the $10 billion still owed by Baghdad. He had hoped to sign a deal on the repayment by the end of this year.

Sodexim, a little-known Moscow-based firm headed by a Viktor Zakharov, undertakes "various trade operations" and carried out 13 million rubles ($530,000) worth of business last year, Interfax said. MIB, headed by Vadim Volkov and Russia's 129th-largest bank by assets, lists the firm as one of its top clients on its web site.

Storchak, who was appointed Deputy Finance Minister in 2005, oversaw the country's repayment of $22.5 billion worth of debt to the Paris Club of creditor nations, as well as negotiations of other countries' Soviet-era debts to Russia.

Kudrin would take over Storchak's duties, Kudrin spokesman Pavel Kuznetsov told Itar-Tass. He also said the arrest was not connected to the case of Denis Mikhailov, the former deputy head of the ministry's debt department, who was arrested in 2004 and convicted last year for accepting a bribe and leaking classified documents.

In a statement released after the arrest became public late Friday night, the ministry tried to distance itself from the case and said it hoped the investigation would be objective.

"The detention took place outside the ministry. It may be related to criminal cases against a third party, not Finance Ministry officials," the statement said.

Kudrin, who has also held the post of deputy prime minister since a Cabinet reshuffle in September, appeared caught off guard by events, and told reporters in South Africa that he was informed of the arrest only after it had happened.

"I don't yet understand these charges, which I will, of course, study in detail," Kudrin said, adding that "I think that the finance minister's opinion of this situation will be taken into consideration."

Kudrin said Storchak, one of three deputy finance ministers, was someone who "everyday struggled for every kopek, for every cent, defending the interests of Russia in all debt negotiations."

Anatoly Kucherena, a top Public Chamber official, hailed the arrest as "real proof that the country's leadership has stepped up the fight against corruption in government agencies."

Kucherena denied that the move was an election-year ploy, noting that Zubkov, who was head of the Federal Financial Monitoring Service until Putin named him prime minister in September, had promised to wage a campaign against corruption.

"It is obvious that it is not an election move on the part of the country's political leadership but a clear sign that a promise to rid agencies of corrupt and dishonest officials is being fulfilled," Kucherena said, Interfax reported.

UralSib chief analyst Chris Weafer likened the arrest to the 2003 campaign against the "werewolves in epaulets," a group of police officers investigated for running an extortion ring. The campaign, led by Duma speaker Boris Gryzlov, boosted the popularity of the newly formed United Russia party ahead of the Duma vote that year.

"We expected to see a more intense campaign against corruption in the bureaucracy" ahead of the coming elections, Weafer said. The move would allay popular concerns over corruption, as well as concerns by investors, he said, noting that Transparency International ranks Russia 143rd out of 179 countries on its corruption perception index.