Russia’s Defense Ministry Crackdown

A raid on Russia’s biggest military contractor leads to questions about the Kremlin’s intentions.

On Thursday morning, Moscow awoke to the news that the Russian version of the FBI had raided the country’s biggest state-owned military contractor, Oboronservis. Three defense-ministry officials were detained in the raid and investigators announced that they were opening five criminal cases into the company’s involvement in an alleged real-estate fraud worth $96 million.

The ministry officials are suspected of investing large sums of money—initially slated for Oboronservis’ budget—into eight prime pieces of property that they then resold to affiliates below the market value. Experts say the raid was part of a Kremlin anticorruption campaign aimed at rooting out fraud in the country’s defense industry, in order to woo outside investors.

Minister of Defense Anatoly Serdyukov, hurried to the scene this morning to watch the raid, even missing a cabinet meeting with the prime minister, which the ministers rarely ever do.

Allegations of corruption at Russia’s defense ministry are nothing new. Earlier this year, the country’s general prosecutor, Sergei Fridinsky, announced that every third criminal case against the Russian military involves either fraud or bribery, and that “144 army unit commanders have been convicted for corruption attempts on military property.”

Insiders say the real target of today’s raid may have been Serdyukov—reportedly one of the least popular ministers inside the Kremlin and a man famous for addressing high-ranking commanders as “little green men.”

A former head of the Russian tax police, Serdyukov is known for having an office full of female accountants and former employees from the tax inspectorate. A former defense ministry press secretary, Viktor Baranets—who now works for the Komsomolskaya Pravda newspaper—claims that Serdyukov’s underlings had been operating a sophisticated financial scheme: “Mansions that belonged to the defense ministry were sold to an affiliated structure, or a brother, or a middle man, or a lover, for kopecks and then later resold by the new owners to a real buyer at a real price,” said Baranets.

Under the guise of making money for the army by selling off the properties, Serdyukov allegedly managed to create multiple commercial holdings and shell corporations, in apparent violation of the law. “As a result, all of Russia’s military forces have been gradually degrading,” says Col. Vladmir Sabatovsky, a former deputy head of transport aviation. “Nobody dared to report, for instance, that only 30 percent of Russian military-transport planes can actually fly.” (Until recently, Russian military officers would only complain about the defense ministry off the record.)

Rumors abound that Putin and his cronies have long desired to replace Serdyukov with a “tougher” man, particularly now that the Kremlin has announced a 59 percent increase in the defense spending budget by 2015, up to $97 billion.

“Putin reacts the best way he knows how to problems in Syria, and to tensions with China and Turkey: he boosts his defense forces,” says independent analyst Dmitry Oreshkin. “Men of power in his team tell him that he will need a tougher guy than [Serdyukov].”

“The best way to get rid of the minister,” says Oreshkin,” was to create a scandal around his corruption.”