By Svetlana Reiter and Jack Stubbs

MOSCOW (Reuters) - On a Friday evening in June, German businessman Yuri Zyudheimer and Russian regional governor Nikita Belykh sat down in a private booth in Megu, an upscale Japanese restaurant in central Moscow.

Zyudheimer placed a dark red plastic bag on the table between the two men, according to the businessman. Inside was a bottle of red wine – a gift for Belykh's recent 41st birthday – and 150,000 euros ($165,000) in cash.

Zyudheimer said he had second thoughts about what he was about to do. "I wanted to say to him: 'Don't do it, don't take it,'" he told Reuters in his first public comments on the case. But he pushed the bag toward Belykh anyway.

The governor, who was supported by the ruling United Russia party but not a member of it, checked the contents of the bag. When he got up to leave, plain clothes officers from the Federal Security Service – in the restaurant pretending to be diners – swooped.

The security service and Zyudheimer had planned the trap, painting the banknotes with a red dye which was now on Belykh's hands. By that evening, the governor was in jail. State prosecutors charged him with receiving bribes totaling 400,000 euros in return for favorable treatment of a company owned by Zyudheimer.

Under Russian law it is illegal for a government official to "use their official powers for election campaigning." But the practice still goes on, with money channeled through slush funds, said Stanislav Andreichyk, head of the regional office of Transparency International, an anti-corruption watchdog.

Faced with a sharp economic slowdown, Russian voters' enthusiasm for the ruling elite is softening. But the Kremlin and United Russia still have to maintain a powerful appeal or lose their legitimacy. Setting up election slush funds is one of the ways it does this, according to four people who spoke with Reuters. The funds funnel money from businessmen to local United Russia officials. The party spends it on campaigning and on public works and infrastructure in the run-up to an election, said multiple people with knowledge of the process, including one former state official.

"It's common practice," said Andrei Kolyadin, who until 2011 was head of the regional politics department in the presidential administration and who has worked on election projects linked to the Kremlin since then.  

Belykh has denied the charges against him. Under questioning by state investigators after his detention, he said the money from Zyudheimer was not a bribe but to pay for "beautification projects," according to a transcript of the interview seen by Reuters.

Belykh would not comment for this story.

According to three people who know him, the governor left himself vulnerable to the bribery charges because he was involved in accumulating money for a slush fund designed to help improve the chances of United Russia, which was founded by President Vladimr Putin. The sting came just three months before a parliamentary election.

The three sources said senior ruling party officials had pushed Belykh to raise the money. Four other sources said Belykh had tapped entrepreneurs for money that was used to finance local infrastructure projects designed to woo voters. Those same sources said that Belykh's mistake was to accept the money directly himself, rather than have it deposited into the slush fund.

Reuters has found two other cases in which allegations of United Russia election slush funds have surfaced, one in Ulyanovsk and the other in Chelyabinsk.

A Kremlin spokesman said Belykh was arrested for receiving a bribe, but did not comment on the broader issue of election slush funds.

United Russia headquarters and regional party officials initially did not respond to Reuters questions. In a statement sent to Reuters after publication, Konstantin Mazurevsky, deputy head of United Russia's central election commission, said all fund raising was carried out in accordance with Russian law.

"This information (allegations about slush funds in regional elections) does not correspond with reality," he said.

The Federal Security Service, the FSB, did not respond to questions.

Putin critics who know Belykh say the governor was vulnerable to prosecution because he was an outsider to the Kremlin system: a former opposition figure with liberal economic views at odds with many of the security hawks in Putin's entourage. While in opposition, he had also criticized Moscow's 2008 military invasion of Georgia.

"The reason for the conflict with Belykh was political," said Ilya Yashin, a former opposition colleague.

After Belykh's party dissolved itself, the Kremlin nominated him for the post of governor of the Kirov region, a provincial backwater in the foothills of the Ural mountains about 1,000 km (620 miles) east of Moscow.

The idea, said several people who know Belykh or were close to the Kremlin, was to silence the politician by bringing him into the ruling fold.

UNPAID DEBTS

One of the largest employers in the Kirov region is a timber company called Novovyatsky Ski Combine, known as NLK. Russian state lender Sberbank had made a series of loans to NLK's former owner Albert Laritsky. The loans turned bad and the company ended up in the hands of Zyudheimer, Belykh's dining companion in the Japanese restaurant.

Zyudheimer told Reuters that governor Belykh pressured his company to repay one of the loans to Sberbank, for which the Kirov region had put up its own assets as collateral. Zyudheimer argued he was not liable for the loan because it had been taken out by the previous owner. There is no suggestion that either Belykh or Zyudheimer did anything illegal in connection to the loan.

Zyudheimer said Belykh also demanded money for his re-election as governor in 2014. In return, Zyudheimer said, Belykh promised to provide financial help for the timber firm.

Zyudheimer alleges that he personally gave Belykh a 200,000 euro bribe in 2014, and another 50,000 euros via an unidentified intermediary in Moscow in May 2016.

Zyudeheimer says help for the timber producer never materialized, but that Belykh asked him for another 150,000 euros at the end of May this year "for elections." At the time, the closest vote was the parliamentary election in September.

That was when he decided to turn Belykh into Russia's FSB security service in Moscow, Zyudheimer said.

"I had no choice," Zyudheimer said. "I understood that this rampage will never end, so I went to the FSB."

Zyudheimer said he gave a written statement to an FSB duty officer. "To begin with, he (the duty officer) didn't believe his eyes. Then he rang upstairs to someone, and an excited crowd of generals... arrived at the duty officer's post," Zyudheimer said.

A few weeks later, he said, security service officers set up the restaurant sting.

BEAUTIFICATION PROJECTS

At a preliminary hearing on Sept. 7, Belykh told a judge that it was "important for me that my reputation as an honest person is vindicated."

According to transcripts of interviews with investigators, Belykh said the projects that needed funding included construction work in the Kirov region. The three sources in Belykh's entourage told Reuters that the projects were aimed at boosting support for United Russia. 

Commenting on Belykh's case, Nikolai Petrov, a specialist in regional politics at Moscow's Higher Economic School, said the scheme was simple: local officials – many of them members of United Russia – get credit for projects come election time.

"For them (party bosses) it's important to create some kind of positive atmosphere before the vote," he said.

The three sources in Belykh's inner circle said the governor owed United Russia for its help in winning Belykh re-election as governor in 2014.

"One of the criteria for judging a governor in his region is the level of support for the ruling party," said Dmitry Russkikh, who was an opposition member of the Kirov region legislative assembly until the end of 2015. "If the governor does not get the required result for United Russia, that will be remembered."

Oleg Valenchuk, head of United Russia in Kirov, did not respond to requests for comment.

SLUSH FUNDS

Kolyadin, the former Kremlin official, said the use of such election slush funds is widespread in Russia.

In some cases, he said, cash collected in a fund was spent directly on financing a United Russia election campaign. Other times, it was spent on local infrastructure projects in the run up to elections.

"It's a clear objective ...that the governor is set, and local party officials demand the accumulation of financial resources," he said.

Reuters found two other such cases that have led to charges.

In May this year, Alsu Balakisheva, a United Russia member and deputy speaker of the regional legislature in the Ulyanovsk region, on the Volga, was arrested on charges of accepting a 500,000 rouble ($8,000) bribe from a local construction firm. She denied the charges.

In court, she said the money was intended for the Ulyanovsk Fund to Support Regional Cooperation and Development, which she headed. Although the fund was created to support social projects, it contributed 1.971 million rubles ($32,000) to candidates running on a United Russia ticket in local elections in 2015, according to election commission records.

Balakisheva's lawyer said his client was under house arrest but declined to comment on the case. United Russia officials in Ulyanovsk region did not respond to questions.

In the other case, former first deputy governor of the industrial Chelyabinsk region, Nikolai Sandakov, awaits trial on charges of accepting a 1.9 million rouble ($30,000) bribe.

"Nikolai said repeatedly in court that this money was a United Russia slush fund," Sandakov's lawyer, Kirill Akulich, told Reuters. He denies the charges.

The money was spent on campaign literature for United Russia candidates, on opinion polling, and on campaign events, the lawyer said.

United Russia officials in Chelyabinsk region did not respond to requests for comment.

FUND-RAISING DRIVE

Belykh launched his fund-raising drive on April 21 this year at the "Vyatka" banqueting hall. In a speech, the governor urged more than 100 local entrepreneurs to help pay for projects including a youth holiday camp in Crimea, a monument to war-time workers, street repairs and renovations to Kirov's Spassky cathedral.

Belykh said contributions should go to a non-governmental fund called "Vyatka," according to seven people present. He also said the fund needed 100 million rubles ($1.54 million).

"The governor ... called on us to give money to improve the image of our native region," said one of those present.

By June, though, the fund had raised just 3 million rubles.

"To repair the street fronts alone we needed 20 million, plus 10 million for some park fountains, and it wasn't clear where we were going to get the money," Andrei Usenko, the fund's director, said.

According to Usenko, Belykh was unflustered: "'Don't worry,'" Usenko recalled him saying. "'By the end of June the money will be in the account.'"

Three days later, the governor sat down for dinner in the Japanese restaurant.

(Edited by Christian Lowe, Richard Woods and Simon Robinson)