PUTIN ON THE RITZ…NOW IT IS A SCHOOLBOOK PURGE
Putin’s Friend Profits in Purge of Schoolbooks
One publisher saw all of his company’s English-language textbooks barred because he had failed to include their subtitles on the paperwork required for government approval. More than three dozen books that use a popular creative teaching style were dropped from a list of authorized titles because the publisher had submitted copies of supporting documents, rather than the originals.
There was, however, one standout winner: A publishing house whose newly appointed chairman was a member of President Vladimir V. Putin’s inner circle, Arkady R. Rotenberg, a judo sparring partner from Mr. Putin’s St. Petersburg youth.
The publisher, Enlightenment, survived the education ministry’s culling almost untouched.
“I have never seen such a level of cynicism and chaos before,” said Vladimir A. Peterson, who manages the publication of the math textbooks developed by his mother.
The purge was the latest in a string of government maneuvers that have positioned Enlightenment, once the sole provider of school textbooks under Soviet rule, to dominate the textbook marketplace once again. Mr. Putin first directed that the state-owned company be sold into private hands, records show, in a deal that circumvented a requirement intended to ensure the highest prices for state assets. Then, having installed Mr. Rotenberg as chairman, Mr. Putin’s government knocked out much of Enlightenment’s competition.
The remaking of Russia’s textbook industry features a murky trail of transactions that dead-ends in the opaque offshore tax haven of Cyprus, and a cast of characters including a federal lawmaker from the party loyal to Mr. Putin and the software giant Microsoft, which recently signed an agreement with Enlightenment to help it provide Windows-based tablets to Russian schools. That deal came after Mr. Rotenberg, though not Enlightenment specifically, had been targeted along with other close Putin friends by international sanctions stemming from Russia’s annexation of Crimea.
Enlightenment’s story also traces, in miniature, the arc of the Russian economy over the last quarter-century, from Soviet state ownership, to privatization, to what might be called the theater of state-sponsored private enterprise that flourishes today under Mr. Putin. In theory, market competition exists. In reality, the Kremlin and its functionaries have divvied up the nation’s strategic industries among a small and malleable circle of allies. They command some of the nation’s largest energy companies, control banks and much of the news media, and, increasingly, have a footprint in smaller sectors, like book publishing, that are nonetheless important to Mr. Putin’s political control.
“The country is now run by a few families, or clans, close to Putin,” said one publisher, who like many others spoke only on the condition of anonymity for fear of retribution. “They used to focus on the very biggest businesses: oil, gas, big infrastructure projects, the banks. But now that they have eaten all the food in that cupboard, they are eating the mice, and the mice’s food, going after smaller and smaller markets.”
A Soviet Legacy
Enlightenment is a legacy of the Soviet era, when the Kremlin sought to ensure the ideologically correct education of the country’s youth through absolute control of the nation’s curriculum. The publisher was an arm of the Education Ministry — which also went by the name Prosveshcheniye, Russian for Enlightenment — and schools had no choice but to use its textbooks.
The collapse of the Soviet Union freed the textbook industry, like publishing generally, from the state’s ideology. Under President Boris N. Yeltsin, new publishers emerged, and schools could freely choose textbooks from a list approved by the government, based on expert opinions from the Russian Academy of Sciences and the Russian Academy of Education, certifying that the material was, among other criteria, factual and age appropriate. New textbooks — and new methods of teaching developed outside Russia — proliferated, creating diversity in what had been a rigid and rote educational system.
In 2011, after years of resisting, the government announced that the state-owned Enlightenment would be put up for sale as part of Russia’s privatization plan. Competition had cost Enlightenment its monopoly, but with about 30 percent of the market, it remained a plum prize.
Russian law requires that state assets be auctioned off to the highest bidder, but a loophole allows the prime minister to issue a directive that effectively limits the competition to a select few. Mr. Putin, who had served two terms as president and would soon run for a third, held the post then, and for months industry rumors had been circulating that Enlightenment was about to be delivered into the hands of one of his oldest friends, Mr. Rotenberg.
During Mr. Putin’s rule, Mr. Rotenberg, who declined repeated requests for an interview for this article, had gone from a modest trader specializing in Finnish goods to one of the most powerful businessmen in Russia, with an estimated worth of $3.1 billion. He is the guiding hand behind a vast banking and construction empire, and the recipient of tens of billions of dollars in government contracts, building everything from roads to gas pipelines to Sochi Olympic-related infrastructure projects and a new airport terminal in Moscow.
Eager to get in on the bidding for Enlightenment, textbook publishers hurriedly enlisted allies in the Russian Parliament to press for an open competition. They were right to be worried: Unbeknown to them, Mr. Putin had already signed a directive circumventing the open auction rule. The order, dated Sept. 27, 2011, designated Gazprombank to act as the government’s agent in finding a qualified buyer for Enlightenment, for a price “not less than” market value.
The choice of the bank signaled the intimacy of the government’s role in the sale. Its assets were managed by Bank Rossiya, an institution whose chairman and largest shareholder is Yuri V. Kovalchuk, another billionaire member of Mr. Putin’s inner circle. Though Enlightenment’s market value was to be determined by an “independent appraiser,” the hiring of the appraiser fell to Gazprombank as well.
The entire process — from valuation to sale — took a matter of weeks.
“It happened very fast,” the publisher who spoke on the condition of anonymity said, “and one thing to know about Russia is that when the bureaucracy moves fast, there’s usually someone moving behind them.”
The next thing anyone knew, the government announced in late December that Enlightenment had been sold to Olma Media Group, a publisher in Moscow specializing in fiction and art books. Records show Mr. Putin personally signed off on the sale.
Olma was a small player, with less than 1.8 percent of the Russian book market, according to the Federal Agency for Press and Mass Communication. But it was politically connected. One of its co-owners was Oleg P. Tkach, a legislator in the upper house of Parliament and member of United Russia, the political party loyal to Mr. Putin. And its authors included Mr. Putin himself, who in 2004 co-wrote a textbook called “Let’s Learn Judo with Vladimir Putin,” the royalties of which went to the black-belt Russian president.
Russian anticorruption law prohibits members of Parliament, like Mr. Tkach, from directly engaging in business activity, much less business activity involving the acquisition of a state-owned company. Olma’s general director, Dmitri N. Ivanov, said Mr. Tkach complied with that law by leaving the running of the company to others.
Only two other publishers were allowed to bid for Enlightenment: a company called Eksmo and another called Drofa, which was subsequently purchased by Eksmo. The government did not disclose their bids, but maintained that the price Olma paid — $71.5 million — was actually higher than its appraised value.
The facts, however, cast doubt on that appraisal.
“It was very cheap,” said one publisher who was shut out of the bidding. “We were all willing to pay more.”
Enlightenment’s business has been steady, with about half its revenue coming from government contracts. In 2012, the year after the sale, its annual revenue was close to three times the purchase price, records show, with net profits of nearly $41 million. The company’s annual report estimated it would earn nearly $57 million for 2013, meaning that profits over just two years would exceed the price Olma had paid.
Mr. Ivanov said the company won the bid by offering the highest price. Justifying its profits since, he said: “We weren’t exactly sitting on our feet. We were working so hard on the effectiveness of the company.” He did, however, acknowledge that before acquiring Enlightenment, Olma Media Group was worth “tens of millions of dollars,” while today the merged company’s value is in the “hundreds of millions.”
The sale price was hardly the only curious thing about the deal.
Just weeks after Olma Media Group bought Enlightenment, it sold it, for an unknown price, to a company registered in Cyprus. Then, in a final circular twist, the Cyprus-based Enlightenment turned around and bought 99 percent of Olma Media Group. Virtually overnight, the true owners of Russia’s largest textbook publisher had become impossible to trace. That is because the merged operation was now registered offshore in Cyprus, a popular tax haven that does not require companies to disclose their shareholders.
It was at this point that Mr. Rotenberg, long rumored to be a beneficiary of the government’s sale of Enlightenment, formally appeared on the scene.
Records show that the initial financing that made the entire transaction possible — a $54.2 million loan — came from SMP Bank, which is controlled by Mr. Rotenberg and his brother, Boris. That loan was then refinanced with a $77.1 million line of credit from Gazprombank, the bank that had appraised and then auctioned off Enlightenment for several million dollars less just weeks before.
Finally, on Oct. 31, 2013, nearly two years after the privatization, Mr. Rotenberg’s role in Enlightenment became official: Following an internal shake-up, he joined the company’s board as chairman.
Mr. Ivanov refused to explain the decision to move the company offshore; he referred questions to Mr. Tkach and his partner, Vladimir I. Uzun, neither of whom responded to written questions or requests for an interview. The move, Mr. Ivanov maintained, had not affected the ownership of the company; the shares, he said, are held by an international fund in trust for the families of Mr. Tkach and Mr. Uzun.
Mr. Rotenberg, he said, has no financial stake and receives no compensation.
But last week, Mr. Rotenberg himself appeared to contradict Mr. Ivanov. As The New York Times was preparing to publish this article, he discussed his role in Enlightenment as part of an interview with the Russian news agency Interfax.
“For me, this is a significant project, and in large part not financial, although it is business as well — there is profit there, there are dividends,” Mr. Rotenberg said. “This should in fact be a decent business.”
A Sudden Directive
The directive came out of nowhere. Henceforth, the Ministry of Education and Science declared late last year, the only textbooks eligible for purchase by Russia’s schools would be those that managed to meet stringent new federal guidelines.
Publishers had to resubmit all the previously required expert reports qualifying their textbooks, plus three new ones prepared by groups authorized by the government to assess the books’ “ethno-cultural” value. What’s more, the ministry would no longer simply rubber stamp experts’ recommendations; it was forming an internal council to assess textbooks itself.
The new requirements, argued the education minister, Dmitri V. Livanov, were needed to ensure quality. But Oleg N. Smolin, an opposition member of Parliament who chairs the education committee, wrote in a letter of protest that the goal was clearly to “artificially decrease the number of textbooks.”
Publishers had limited time to gather the necessary opinions, and a number of smaller publishing houses simply could not comply. Still, many managed to meet the February deadline, and that was when “they started doing all these crazy things to knock out more,” said one person knowledgeable about the industry.
Aleksei V. Konobeyev, editor in chief of Titul Publishers, said he received a phone call informing him that all 20 of the books his company submitted had been barred. Titul publishes English-language textbooks, including a line for grades 2 to 11 titled “Enjoy English.” The series is the most popular in the country; according to the publisher, about 70 percent of students taking English use the books.
Mr. Konobeyev knew that his company had submitted all the required expert opinions. So what, he asked, was the problem? The answer, he said in an interview, left him “incredulous.”
First the ministry contended that Titul’s submissions had been incomplete; then, when challenged, it declared that it had found a fatal “discrepancy” in the paperwork: Though the expert reports the company provided referred to the author and title of each textbook, the ministry stated that it could not be sure that the books submitted were in fact the ones reviewed — because the expert reports did not contain the subtitles from their inner pages.
Another publisher, Fyodorov, was told by a ministry official that it could submit photocopies of its documents, only to learn that 38 of 42 textbooks had been knocked out because it had done just that. Titul filed a lawsuit challenging the exclusions, so far to no avail; Fyodorov filed a similar suit, but a court dismissed it, and now the company is in talks to be acquired.
Other publishers, like Mr. Peterson and his mother, saw their textbooks disqualified as contrary to Russian values.
Ms. Peterson had created the concept behind her textbooks in the heady years after the Soviet collapse. The cartoon characters she used to illustrate math problems came not only from the West, but also included Russian characters and symbols. One, Karlsson-on-the-Roof, was the creation of the Swedish author Astrid Lindgren, but the portly hero was the subject of a beloved animated film produced in the Soviet Union.
Mr. Peterson said the rejections, the first in the company’s history, were based entirely on the finding of only one of the nine reviewers. “If this expert was given a physics textbook, I am sure, she would see Newton’s law and find it unpatriotic,” he said.
Enlightenment, for its part, emerged with only a handful of its books — 6 percent — disqualified. It led the revamped list with 415 approved books; the runner-up, with 296, was its unsuccessful suitor, Eksmo.
In the first seven months of the year, Russia’s schools spent $187 million on textbooks. Enlightenment won 60 percent to 70 percent of those contracts, according to Mikhail Morozovsky, editor in chief of the trade journal Book Business, who based his estimate on an analysis of government procurement records. In addition, Enlightenment is now providing around 80 percent of all the textbooks that Russia is sending to schools in the newly annexed Crimea.
“It’s like what they say in ‘Animal Farm,’ ” one competitor said. “All animals are equal, but some animals are more equal than others.”
Thousands Protest
Changes in curriculum are not to be taken lightly. Sticking with a single line of textbooks ensures that students build upon the skills they learn from year to year. Additionally, different textbooks employ different teaching styles. Enlightenment, for instance, publishes Soviet-style texts that emphasize rote memorization. The textbooks produced by Fyodorov use a more progressive teaching method called the Zankov system, which is aimed at teaching children how to think. The Zankov textbooks are quite popular, and their exclusion prompted a rare public display of protest.
The books’ authors gathered more than 25,000 signatures and petitioned the education minister, Mr. Livanov. “Thousands of teachers and parents from all regions of the Russian Federation who want to choose for their children a path to individual and optimal development of characters share in our concern,” they wrote.
Yelena A. Ilinykh, a first-grade teacher in Moscow, is one. The very superiority of Fyodorov’s textbooks is what led them to be barred, she said in an interview near her school, because they threatened the market share of its politically connected competitor.
“This whole list is a political order for Moscow, which is representing the interests of one publisher: Enlightenment,” she said.
In a statement, the ministry defended its actions, saying the old list contained “outdated textbooks whose quality was under question” and was so large as to be unwieldy. “It was hard for teachers, parents and students to make a right and conscious choice,” the statement said. In public remarks in March, Mr. Livanov said popularity was not a measure of quality. “You cannot say that because multiple schools use a textbook, then that means it is good,” he said. “Many people drink Coca-Cola, but that does not mean it is good for you.”
Tatyana G. Mitugina, an English teacher from Bryansk, scoffed at that reasoning. In an online education forum, she protested the decision to exclude Titul’s English-language books. “ ‘Enjoy English’ does not have anything in common with Coca-Cola,” she wrote. “These are amazing Russian textbooks, confirmed by practice.”
The ministry, in an apparent concession to the public anger, gave schools a few years to phase out the books that did not make the list, but made clear that only students who had started to use them could continue. (Of course, many schools, mindful of the ministry’s power and fearful of losing accreditation, immediately switched over anyway.)
“We were told that all the schools will be undergoing inspections,” Ms. Ilinykh, the teacher in Moscow, said. “And if they find out that teachers are using textbooks not on the list for more than just continuing students, then the school could get funds cut or layoffs, or I don’t even know what else.”
Mr. Konobeyev of Titul said the temporary reprieve simply underscored the arbitrariness of the government’s decision.
“If the books are not good enough, why are you allowing them to be used for the next five years, and if they are as good as our experts say and the teachers say, why are they not on the list?” he asked. “I find the whole thing Kafkaesque.”
Profit and Ideology
There may be multiple motives behind the reshuffling of Russia’s textbook industry. Given Mr. Rotenberg’s involvement, and with Russia increasingly at odds with the West, some see it as a sign of Mr. Putin’s drive to ensure the loyalty and patriotism of Russia’s youth.
“When my future partners at Enlightenment started to tell me about what is happening here in the area of educational literature, when I found out that we have dozens of textbooks not only on history, but also on physics or mathematics, I realized that everything was not really great here,” Mr. Rotenberg said in the Interfax interview.
Now, the Kremlin appears to be going further. Last month, legislators introduced a bill to establish unified textbooks for all history, literature and Russian language classes — a proposal that has been debated for years but appears to have new life.
“The bacchanalia of textbooks until now has been destroying our youth,” said one of the lawmakers involved, Frants A. Klintsevich, according to a transcript of the hearing.
Mr. Putin’s critics see a corrupted system motivated as much by avarice as ideology. The government has in recent months come to the aid of Mr. Rotenberg, who was 14 when he first met Mr. Putin at a judo club in Leningrad and owns a palace outside Moscow that rivals Versailles in its opulence.
After the Obama administration sanctioned SMP Bank — in which Mr. Rotenberg and his brother own a 76 percent stake — Russia’s Central Bank gave it a 10-year, $3 billion loan with a below-market interest rate, ostensibly to take over another struggling lender. When Italy seized $40 million of property Mr. Rotenberg owns there through offshore companies, including a luxury hotel in Rome and two villas in Sardinia, the lower house of Parliament quickly passed legislation allowing citizens whose property had been seized to seek compensation from the government. Though the tycoon has said he does not plan to take advantage of it, the bill was immediately called “the Rotenberg law.”
Whatever Mr. Rotenberg’s precise relationship to Enlightenment, his role as chairman offers the company the sort of protection — known as “krysha,” or roof — that ensures a favored status in the bureaucracy. The publishing house is not only well positioned to take advantage of the unified textbook mandate, but also another new directive that mandates that all textbook publishers offer electronic versions of their books by January 2015.
According to Mr. Konobeyev, smaller publishers like Titul are still waiting for the ministry’s electronic textbook guidelines. Enlightenment, however, is ready to go, according to Mr. Ivanov. The agreement the publisher signed with Microsoft in late September, to share research and development on a Windows-based tablet that could be provided to schools across the country, should only “strengthen our position in the market,” he said.
The question for Microsoft, as with many American companies doing business in Mr. Putin’s Russia, is whether the potential profits outweigh the risk. United States law forbids American companies from doing business with companies majority-owned or controlled by sanctioned people like Mr. Rotenberg.
His presence on the board, the opacity of the ownership structure and other elements of the sale should make an American company reluctant to do business with Enlightenment, said Katrina Carroll, a lawyer at WilmerHale who until last year was a senior officer in the Treasury Department’s office of terrorist financing and financial crimes. “I’d never advise a client of mine to go forward under these circumstances,” she said.
Last week, Microsoft decided to put off its plans, based on new information it had received from The Times.
“Microsoft signed a nonbinding agreement to provide, free of charge, to Prosveshcheniye, the same type of technical assistance that we provide at no cost to thousands of schools and publishers worldwide,” the company said in a statement. “Although we conducted due diligence in both Russia and the U.S. — including consulting the U.S. government and engaging respected international law firms — and have not found evidence that Prosveshcheniye is subject to U.S. or E.U. sanctions, we’ll follow up on the concerns by postponing work under the agreement and conducting an additional review.”
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