Cleveland, a Kleptocrat's Paradise: An Interview with Casey Michel
Casey Michel | American Kleptocracy: How the U.S. Created the World's Greatest Money Laundering Scheme in History | St. Martin’s Press | 2021 | 368 Pages
By now, most people can readily conjure an image of the offshore havens where the uber-wealthy hide their dazzling riches to avoid the tax man: the pearly white beaches of the Cayman Islands; the mangroves; the plush cabana where the oily manager of a shell company sips a mango daiquiri with an umbrella perched on the rim, fielding calls from unsavory clients.
In his book American Kleptocracy, journalist Casey Michel argues that this image is already an outdated mental map for the new geography of dirty money.
Forget the Cayman Islands. Picture instead the rundown Huntington building in Cleveland's downtown skyline and an abandoned steel plant in Warren, Ohio—complete with open sewage and peeling paint. These sites are the latest shelters for the global elite’s illicit treasures. Within its own borders, the US has become the go-to laundromat for foreign oligarchs, industry tycoons, and autocrats looking to clean their sullied fortunes through real estate, shell companies, and escrow accounts. The twin pillars of financial deregulation and globalization turned the US into the tax haven of the world all while enriching a coterie of shady lawyers and real estate brokers who help the kleptocrats get away with it.
As Michel details in the book, the wealthy increasingly avoid the scrutiny that comes with purchasing high value real estate in cities such as New York, Miami, or Malibu. Instead, they funnel money into the post-industrial American heartland where no investigators would think to look and no local officials ask second questions.
That was the method employed by Igor Kolomoisky, a notorious Ukrainian oligarch and the central character in Michel's book. In many ways, he epitomizes the post-Soviet experience of both the Russian and Ukrainian oligarch classes, now top customers for US money laundering services.
Kolomoisky’s cartoonish machinations would be almost beyond parody if they weren't so sinister. When business clients walked into his office, they would immediately see a large shark aquarium next to his desk. If the negotiations weren't going well, Kolomoisky would feed crabmeat to the sharks as an intimidation tactic. A steel baron and oil magnate, he used Cleveland and a collection of manufacturing plants across the Rust Belt to pull off what US investigators have called one of the largest Ponzi Schemes in history.
Through his commercial bank, Kolomoisky defrauded millions of Ukrainians. He took their deposits, and transferred their sums into numerous shell companies, known as the Optima Network. He then parked the money through Middle American real estate and manufacturing plants, tapping the sites as rainy day funds and loan-recycling schemes to cover the books. In the process, he became the largest commercial real estate landowner in Cleveland.
When Ukrainian authorities eventually caught on to the scheme in 2016, the fallout required a government bailout that put the country in financial ruin. While all of this chicanery was going on, the Ukrainian government handed over much of its military operations in the Donbas region to Kolomoisky's private army, including the neo-Nazi Azov battalion.
Casey Michel's book came out at the tail end of 2021. Since Russia’s invasion of Ukraine, it has taken on new meaning, exposing the national security implications of these financial networks hosted in the US. Michel, a journalist and Adjunct Fellow with the Hudson Institute's Kleptocracy Initiative, has since argued that American kleptocracy bears a weighty responsibility for the conditions that led to the war by fortifying autocratic regimes like Putin's and hollowing out democracies such as Ukraine's.
I interviewed Michel about how the war has shed new light on the dangers of kleptocracy, Kolomoisky's ties to Zelensky, and where all this fraud leaves cities like Cleveland that are still susceptible to money laundering schemes.
This interview has been edited for brevity and clarity.
Luke Goldstein: What has our good pal Igor Kolomoisky been up to since the war broke out?
Casey Michel: Kolomoisky has kept a notably low profile in Ukraine which is distinct from the first phase of the war in 2014 when he was a lynchpin of Ukrainian Defense Forces and ran his own private militia in Central Ukraine. When this new phase of the war broke out, I and many others were concerned that the government might turn to him as a source of resources and support. Thankfully that hasn't panned out yet. We have, though, seen other oligarchs try to take advantage of the situation. Many oligarchs have professed their support for NATO, the EU, alliances with Western countries, etc. and offered to provide resources in exchange for political favors–a particularly attractive favor being the absence of governmental investigations into their private wealth.
LG: How do you think your book has gained new relevance since the invasion of Ukraine? Would you re-frame or summarize your book differently if it came out today?
CM: The core argument of the book remains the same although some of the implications have now changed. The invasion of Ukraine has made the linkage between kleptocracy and national security inescapable. Kleptocratic regimes like Putin's are able to use these financial networks to hold on to power for decades and then use that consolidation power to launch an unprompted war of aggression.
In Ukraine's case, the state has been completely hollowed out and pillaged by its oligarchic class. That left the country vulnerable to the invasion and perhaps even emboldened Putin's calculus that he could easily seize Ukraine. Take for example Viktor Yanukovych [former president of Ukraine ousted during the Maidan revolution in 2014] who poured millions into tax havens across the West. The corruption of his regime has a lot of responsibility for the war because it sold off huge chunks of the Ukrainian military. I have no doubt that Putin thought this war would be yet another cake walk because he viewed the Ukrainian government as dysfunctional, overseen by an oligarchic class enmeshed with the political class and would more than happily be bought off.
LG: When the war broke out, you wrote a piece in the New Republic arguing that American kleptocracy played a key role in paving the road to war in Ukraine. What responsibility do you think the US bears for the war?
CM: The US set up the incentive structure for oligarchs to offshore their wealth. They provided the legal loopholes for these wealth transfers and neglected federal oversight of some of these specific industries: shell companies, trusts and real estate. These kleptocratic financial networks work to the detriment of democracies such as Ukraine and to the benefit of authoritarian regimes like Putin's. It can't be understated just how destabilizing this flow of dirty money has been to the region. None of this is to deflect blame from Putin for the direct invasion but there are exogenous factors that hollowed out the Ukrainian economy and allowed for strategic corruption to emerge.
LG: Igor Kolomoisky owned the network that Zelensky's TV show aired on. He was also a major backer of his presidential campaign. Just before your book was released, the Pandora Papers revealed that Zelensky was using a number of offshore tax havens to hide his wealth. Several of these offshore firms allegedly received millions of dollars from Kolomoisky's Privatbank during the years when he owned it. How do you view Zelensky's involvement in the kleptocracy system that the US has facilitated and how deep are his ties to Kolomoisky ?
CM: When he was elected in 2019, the top concern about Zelensky was whether he’d be able to make good on his promises to crack down on the oligarch class given that his rise to power was so indebted to Kolomoisky. Well, before the war at least it had been a mixed picture. He certainly followed through on certain reforms, defining what an oligarch actually is and putting certain restrictions on the assets they can own. But then the Pandora Papers came out and raised more questions about why he wasn't moving faster on these initiatives as well as his relationship with Kolomoisky and PrivatBank.
When the war ends, we're going to have to face some really difficult questions about Ukraine's reconstruction and to what extent the US should be involved. I have a quote in the book from Larry Summers, of all people, explaining why the US was reluctant to and ultimately didn't provide a Marshall plan to Russia after the collapse of the Soviet Union: we feared the money would just end up in some Swiss bank account. This is why counter-kleptocracy reforms need to go hand in hand with any future aid for reconstruction. That's a large part of what's gone wrong with our democracy-building initiatives in Iraq and Afghanistan.
LG: Your book frequently revisits the 90s shock therapy period in the post-Soviet countries as a kind of original sin for the development of American kleptocracy. In this era, Kolomoisky built his steel and metal empire at the same time as the US started to become the world's largest laundromat. Many Russian experts would agree that Putin's revanchist ambitions to reconquer the former empire also have their origins in the humiliations Russia suffered in this period. How did the conditions created by shock therapy lead to the rise of kleptocracy and money laundering into the US?
CM: In brief, the deregulatory ethos that swept through the US in the 70s and 80s was exported to the post-Soviet countries. That's what delivered privatization and the massive loans for shares schemes that created the first crop of oligarchs. Those oligarchs then looked to the West to launder their money. The US and other countries were wide open for all of this oligarchic wealth to come barreling in with no questions asked.
It's impossible to disentangle the broader economic deregulatory ethos we pushed on these countries and creation of the oligarchs with the sense of humiliation the people experienced. It bred a thirst for retaliation among an impoverished and in many ways disenfranchised public in places like Russia and other former Soviet satellite states.
LG: And what are the lessons that we should draw from the failures of this period?
CM: The clearest lesson is that capital is not apolitical, which was one of the key articles of faith of globalization. Capital simply can't be trusted to always support democratic efforts. There's a very clear tension throughout the book that the US government pushes and pursues many pro-democracy and anti-corruption programs around the world, yet within our own borders, the US allowed itself to be transformed into the world's biggest offshore financial piggybank. Our financial secrecy directly undercuts all of these anti-corruption, pro-democracy efforts. The contradiction exposes a huge flaw in the system of the past several decades and it's no wonder we haven't made much headway with our democratic efforts abroad.
LG: Why did Kolomoisky and the Optima Network pick out Cleveland?
CM: The Kolomoisky chapter in Cleveland's story is part of the larger history of deindustrialization, the hollowing out of the Rust Belt and Midwestern economies. Decades of economic devastation and lost jobs left the city so desperate for investment that it would look the other way when shady financiers came calling. So it was right there for the taking; I suspect if it wasn't the Kolomoisky network it would have been another oligarch.
The tragedy is that local officials thought the Optima Network were throwing the city a lifeline and could help it escape this economic death spiral. They didn't do their due diligence to look into the sources of the wealth—but in fairness they had no incentive to. The reality is that local officials in places like Cleveland knew that if they didn't take the money and play ball then it would just filter somewhere else, maybe Detroit or Chicago or another area that has fallen on hard times. It's the race to the bottom.
LG: What has the fallout looked like for Cleveland and these other towns and how have these oligarch takeovers put them in a worse position to rebuild their economies?
CM: I have a quote in the book from an investigator on the Kolomoisky case who compares the sudden infusion of kleptocrat money into these towns to a flash flood on a dry streambed. When the money suddenly dries up, the towns are arguably worse off. These towns in West Virginia, Ohio, and Michigan believed these Ukrainian investors would bring back jobs and revitalization. Years went by and they didn't see any of those promises delivered because Kolomoisky had no intention of actually refurbishing those buildings; the whole scheme was just to launder money. The plants begin to erode, the mold sets in, the sprinkler systems no longer work, they begin imploding.
Soon enough, those assets are so damaged from neglect that they're worthless and the town is eventually left to pick up the tab. At the plant in Warren, Ohio which was actually up and running, the building collapsed, sending workers to the hospital with burns and broken limbs. In Cleveland, Kolomoisky drove the city's real estate assets down into the ground and at best set the city back 15-20 years.
What's striking is how similar these towns looked to the crumbling Soviet steel mills and manufacturing plants I visited when I was working there in the 2000s. These are the outcomes of a decaying empire. First the oligarchs stripped out those industrial facilities in the Eastern blocs in the 90s and then eventually they did the same in the US.
LG: We seem to be living through a kind of golden age for scammers, fraudsters, and ponzi schemers. Kolomoisky and the Optima Network certainly add to the list. What do you think is at the root of this phenomenon? Is this just the byproduct of a new Gilded Age?
CM: This is certainly one of the golden ages of Ponzi schemers in the West, at least since the original Gilded Age. I think much of it can be traced to two things: spiraling wealth inequality, destabilizing populations and spreading destitution; and lack of financial transparency. Those factors create fertile fields for scammers, which we've seen run rampant now for years. And there's no reason to think that won't continue, absent significant counter-kleptocracy reforms.