Kitabı oku: «Putin’s People»

2
Inside Job

*

‘What we’ve discussed is how the darkest forces never give up. The French Revolution, the Soviet one, all the others, appear first as a liberating struggle. But they soon morph into military dictatorship. The early heroes look like idiots, the thugs show their true faces, and the cycle (which isn’t what revolution means) is complete.’

Christian Michel

*

MOSCOW, August 25 1991 – It was late in the evening when Nikolai Kruchina trudged wearily through the door to his flat in the closely-guarded compound for the Party elite. Just four days before, on August 21, the attempted coup by Communist hard-liners seeking to preserve Soviet power had collapsed in failure. And now, the institutions Kruchina had served for most of his life were being dismantled in front of his eyes. The evening before, he’d held a series of high-level meetings with the powerful boss of the Central Committee’s International Department, Valentin Falin, and he seemed exhausted.[1] The KGB watchman outside his home noticed his downcast gaze, his clear reluctance to talk.[2]

The changes in those four short days had come thick and fast. First, the pro-democratic Russian leader Boris Yeltsin had signed a decree, broadcast live, suspending the Soviet Communist Party and ending its decades of rule. Yeltsin’s defiant stance against the hard-line leaders of the attempted coup had put him firmly in the ascendant. He now by far eclipsed Gorbachev, who stood timidly to the side of the podium as Yeltsin addressed the Russian parliament. Arguing that the Communist Party was to blame for the illegal coup, Yeltsin ordered that the sprawling, warren-like headquarters of the Party’s Central Committee on Moscow’s Old Square be immediately sealed. Filed in hundreds of its rooms were the secrets of the Soviet Union’s vast financial empire, a network that spanned thousands of administrative buildings, hotels, dachas and sanatoriums, as well as the Party’s hard-currency bank accounts and untold hundreds, perhaps thousands, of foreign firms set up as joint ventures in the dying days of the regime. Through these bank accounts and other connected firms, the strategic operations of the Communist Party abroad – and those of allied political parties – had been funded. It was the engine room of the Soviet struggle for supremacy against the West. This was the empire Kruchina had administered as the chief of the Communist Party’s property department since 1983. Its sudden sealing felt like a symbol of all that was lost.

Kruchina’s wife turned in early that night, leaving her husband alone, she believed, to spend the night sleeping on the couch. But early the next morning she was awoken by a knock on her door. It was the KGB watchman. Her husband, she was told, had fallen to his death from the window of their seventh-floor flat.[3]

There were no apparent signs of disturbance, and the watchman said he’d discovered a crumpled note lying on the pavement next to Kruchina’s body. ‘I’m not a conspirator,’ it said. ‘But I’m a coward. Please tell the Soviet people this.’[4] The KGB immediately declared his death a suicide. But to this day, no one knows what exactly happened – or if they do, they are not willing to tell. Those who were at the centre of events in those days, like Viktor Gerashchenko, then the head of the Soviet state bank, prefer to limit their explanations to a Delphic ‘He fell.’[5] Others like Nikolai Leonov, then the powerful head of the KGB’s analytical department, insist that Kruchina was a victim of a ‘deep depression’ that set in at the empire’s collapse.[6]

A little over a month later, the same thing happened to Kruchina’s predecessor as property department chief. On the evening of October 6, Georgy Pavlov fell to his death from the window of his flat. His death, at the age of eighty-one, was also recorded as a suicide. Eleven days after Pavlov’s death, another high-ranking member of the Party’s financial machine fell to his death from his balcony. This time it was the American Section chief of the Communist Party’s international department, Dmitry Lissovolik. Again, it was recorded as a suicide.

What linked the three men was an intimate knowledge of the secret financing systems of the Communist Party at the time the KGB was preparing for the transition to a market economy under Gorbachev’s perestroika reforms. The property department Kruchina and Pavlov oversaw had been understood to have a value of $9 billion.[7] Western experts estimated its foreign holdings at many times more.[8] But in the first few days after the Communist Party’s collapse, Russia’s new rulers were bewildered to discover that the Party’s coffers were nearly empty. Rumours abounded that officials, overseen by Kruchina, had siphoned billions of roubles and other currencies through foreign joint ventures hastily set up in the final years of the regime.[9] Russian prosecutors, originally ordered by Yeltsin to investigate the Communist Party for its role in the August coup attempt, were soon redirected to investigate what had happened to the Party funds.

Although Yeltsin ordered the offices of the Central Committee on Old Square to be sealed, Valentin Falin, the head of the committee’s International Department, which oversaw the funding of foreign operations, immediately ordered his subordinates to start destroying documents.[10] What lay in the archives could provide a roadmap to the crimes of the Communist regime and, most importantly of all, to the cash that had been stashed away.

The most top-secret operations had been run out of Room 516, which had housed the International Department’s special section for ‘Party technology’. It was headed by Vladimir Osintsev, a specialist in black operations, who ran Communist Party influence campaigns to sow discord in countries where the existence of the Party was illegal, such as El Salvador, Turkey, South Africa and Chile. When the Russian prosecutors finally entered this room months later, in October 1991, reams of shredded files were found in ribbons across the floor. But signs of the lengths Party operatives had gone to run sleeper agents under deep cover remained. The prosecutors found piles of foreign passports and stamps from many different countries, heaps of other blank travel documents, and official stamps and visas waiting to be forged. There was a huge photo album filled with pictures of people of all types and races, a selection of wigs and beards, and even rubber moulds for faking fingerprints.[11]

One of the International Department’s employees, Anatoly Smirnov, had rebelled, and smuggled out what he could.[12] The top-secret documents he managed to extract included details of hundreds of millions of dollars in payments to Communist-linked parties abroad. One such document, dated December 5 1989, showed an order for the Soviet state bank to transfer $22 million directly to Falin for the Party’s International Fund for left-wing organisations.[13] Another, dated June 20 1987, ordered Gosbank, the central bank of the USSR, to transfer $1 million to the Party’s curator for international affairs to provide the French Communist Party with additional funds.[14] The physical transfer of the money to France was to be organised by the KGB.

To Smirnov, the fact that the Party was regularly dipping into state coffers to fund its political and influence operations abroad meant that ‘a crime was being committed against our people’.[15] For him, this was a red line. It was against Soviet law. The Party’s operations should have been funded from the donations it collected from members, not from state coffers.[16]

The Russian prosecutors calculated that more than $200 million had been transferred out of the Soviet Union to fund Communist-linked parties in the USSR’s final decade of existence; Smirnov put the total at many times more.[17] The sums transferred by more surreptitious means, for more clandestine activities, remained unknown.

But as the team of prosecutors trawled through what remained of the Central Committee’s archive, they began to find documents that cast light on the myriad of unofficial, secret schemes via which billions of dollars more in funds seemed to have been siphoned out. One such scheme involved what the Soviets called ‘friendly’ firms. These were the crony companies at the heart of the vast system of black-market operations that kept the eastern bloc afloat. Many of them were involved in the smuggling of embargoed technology. They included the string of front companies the East German trade official Alexander Schalck-Golodkowski deployed across East Germany, Austria, Switzerland and Liechtenstein. Others were involved in selling much-needed equipment to the Soviet oil, nuclear power and manufacturing industries at prices that were inflated many times over, while the profits were used to fund the activities of the Communist Party and other leftist movements in Italy, France, Spain, the UK and elsewhere.[18]

The money the CPSU would send directly to fund Communist Parties’ activities was nothing compared to the amounts sent via the friendly firms, said Antonio Fallico, a senior Italian banker with close ties to the top of the Soviet elite, and later to the Putin regime too. The official donations the Italian Communist Party received annually from the Soviet Union were ‘only about $15–20 million. This is not even money.’ The real funding, he said, came from the intermediaries. ‘All Italian firms who wanted to do business in the Soviet Union had to pay money to these firms … This was a colossal flow of money.’[19] A list of forty-five such ‘friendly firms’ was disclosed by prosecutors rooting through the archives. Among the mostly obscure import-export firms was at least one well-known name: Robert Maxwell’s Pergamon Press, a vast publishing house that had long been a channel for the sale of Soviet science books to the West.[20] Just days before the list was published, the body of the controversial former Labour MP and media tycoon had been found floating in the Atlantic Ocean not far from his yacht.

Other companies working with the Soviet regime that stayed off the radar included titans of European industry such as Fiat, Merloni, Olivetti, Siemens and Thyssen, according to a former KGB operative who worked closely with Putin in the nineties, and another businessman who worked in these ‘friendly firms’ during Soviet times. This businessman, who would speak only on condition of anonymity, said his firm had supplied military goods under the guise of medical equipment: ‘The medical equipment – it was a façade. Behind it, the firm produced very serious military equipment. It was the same with Siemens and with ThyssenKrupp. All of them were providing dual-use equipment to the Soviets. These friendly firms were not just fronts, the way things operate now. It was major European companies.’[21]

The network of friendly firms was not only involved in imports. According to one former aide to Gorbachev, some of them were engaged in barter operations that had been under way since the 1970s under Brezhnev.[22] The state oil-export monopoly Soyuznefteexport had, for instance, engaged in an elaborate scheme to barter oil for embargoed goods. It had first delivered oil via traders to vast storage reservoirs in Finland, where the oil’s origins were disguised before a web of intermediaries sold it on in exchange for embargoed technology and other goods, according to a former Soyuznefteexport associate. Fertiliser exports, too, had long been part of these schemes.

For the Russian prosecutors trying to investigate the Party’s finances, the traces of these schemes presented the biggest red flag. Untold fortunes in oil, metals, cotton, chemicals and arms had been transported out of the Soviet Union, either through barter schemes or export deals, and sold at knockdown prices to the intermediary friendly firms in the West. Under the export deals, the friendly firms would buy the raw materials at the Soviet internal price, which was fixed low under the rules of the planned economy, enabling them to reap vast profits when they sold them on at world market prices: the global oil price, for example, was almost ten times higher than the internal Soviet price in those days.[23] They could then stash the funds away into a web of accounts in friendly banks in Europe, such as Switzerland’s Banco del Gottardo, and tax havens in Cyprus, Liechtenstein, Panama, Hong Kong and the British Channel Islands. The fortunes they made could be deployed for the activities of the Communist Party abroad, for active measures to destabilise the West. Most importantly of all, the entire process was overseen by the KGB, whose associates manned the friendly firms and controlled much of the Soviet trade ministry. ‘The friendly firms sold what they had acquired for global prices. The profit was never returned to the Soviet Union,’ wrote the prosecutor general tasked with overseeing the investigation, Valentin Stepankov. ‘All contact with the friendly firms was carried out by the KGB.’[24]

The siphoning of commodities had rapidly accelerated in the final years of the Soviet regime. Later, the one-time head of economic analysis for Soviet military intelligence, Vitaly Shlykov, claimed that a large part of the Soviet Union’s huge military stockpiles of raw materials – literal mountains of aluminium, copper, steel, titanium and other metals – that had been intended to keep the Soviet military machine running for decades to come, were fast dwindling by the time of the Soviet collapse.[25] Prosecutors, however, found only scraps of information. The raw-materials deals had left barely any trace.

But as they searched the debris and destruction, the reams of shredded paper on the floor, the prosecutors found one vital document, which looked as if it might provide a partial key to what happened in the twilight years of the Communist regime. It was a memo, dated August 23 1990, signed by Gorbachev’s deputy general secretary Vladimir Ivashko, and it ordered the creation of an ‘invisible economy’ for the Communist Party.[26] The top Party leadership had evidently recognised that it urgently needed to create a network of firms and joint ventures that would protect and hide the Party’s financial interests as Gorbachev’s reforms sent the country hurtling into chaos. The Party was to invest its hard-currency resources into the capital of international firms operated by ‘friends’. The funds and business associations would have ‘minimum visible links’.

An even more telltale document was found in Nikolai Kruchina’s apartment. When investigators arrived after he had plunged to his death, they found a file lying on his desk. Inside were documents that pointed to a potentially vast network of proxies managing funds for the regime.[27] One of the documents they reportedly found had spaces left blank for the name, Party number and signature of the Party member signing up to become a trusted proxy, a doverennoye litso, or custodian of the Party’s funds and property.

‘I _________ CPSU member since _____, Party number _____, with the following confirm my conscious and voluntary decision to become a trusted custodian of the Party and to carry out the tasks set for me by the Party at any post in any situation, without disclosing my membership of the institute of trusted custodians.

I pledge to preserve and carefully deploy in the interests of the Party the financial and material resources entrusted to me, and I guarantee the return of these resources at the first demand. Everything I earn as a result of economic activities with the Party’s funds I recognise as the Party’s property, and guarantee its transfer at any time and any place.

I pledge to observe the strict confidentiality of this information, and to carry out the orders of the Party, given to me by the individuals authorised to do so.

Signature of CPSU member _________________

Signature of the person taking on the duty _______________’[28]

The prosecutors scrambled to unravel what this document might mean. Few of the Party leadership and other members of the Party elite they questioned would reveal anything. Most claimed that they had been unaware of any such schemes. But the prosecutors’ team struck lucky when they came across Leonid Veselovsky, a former colonel in the foreign-intelligence directorate of the KGB. Fearing a wave of repressions, Veselovsky spoke openly of how he’d been one of a number of top KGB foreign-intelligence operatives drafted in to help manage and hide the Party’s property and wealth.[29] The foreign-intelligence officers were brought in for their knowledge of how Western financial systems worked. They reported to Kruchina, the property department chief, as well as to Vladimir Kryuchkov, the KGB chief, and Filip Bobkov, then the first deputy head of the KGB, and Vladimir Ivashko, the treasurer of the Central Committee.

Veselovsky, a specialist in international economics, had been transferred from his post in Portugal in November 1990 to work on the plan to create an ‘invisible economy’ for the Party’s wealth. It was he who proposed the system of ‘trusted custodians’, or doverenniye litsa, who would hold and manage funds on the Party’s behalf. He’d prepared a series of notes for Kruchina with proposals for disguising the Party funds to protect them from confiscation. These included investing them in charitable or social funds, or anonymously in stocks and shares. The process was to be led by the KGB.

‘On the one hand this will ensure a stable income independent of the future position of the Party. And on the other, these shares can be sold at any moment through stock exchanges and then transferred to other spheres to disguise the Party’s participation while retaining control,’ he wrote. ‘In order to conduct such measures there needs to be an urgent selection of trusted custodians who can carry out separate points of the programme. It could be possible to create a system of secret Party members who will ensure the Party’s existence under any conditions of these extreme times.’[30]

In another note, he suggested the creation of a network of companies and joint ventures, including brokerages and trading firms, in tax havens such as Switzerland, where the shareholders would be the ‘trusted custodians’.[31]

Just as the Stasi had begun preparing, transferring funds into a network of front companies before the fall, the KGB was readying the Party for regime change, fully aware that its monopoly on power was becoming ever more precarious. To some operatives of the foreign-intelligence network drafted in to work on the scheme, when they received the orders from Kryuchkov to start creating private companies it was a clear signal that the game was up for the Communist regime. ‘As soon as this happened, I understood it was the end,’ said Yury Shvets, a senior officer in the KGB’s Washington station until 1987.[32]

But when, after the botched coup attempt of August 1991, the Soviet Communist Party was suddenly no more, it was not at all clear what had happened to the structures created to preserve its wealth, or who was in charge of them. For the Russian prosecutors investigating, the documents left behind in the archives and in Kruchina’s flat provided only the faint outlines of the network. The figures and cogs in the schemes, the trusted proxies, the doverenniye litsa managing the funds, the network of companies, joint ventures and brokerages were hidden.[33] When later questioned about the documents, former members of the Politburo insisted that the collapse had come so swiftly and unexpectedly that no one had had time to implement Ivashko’s plans for the ‘invisible economy’.[34] But the prosecutors found plenty of signs that the project had been at least partially activated, and was long under way – and that it appeared to be led by the foreign-intelligence arm of the KGB.

Veselovsky’s career was just one indication. Two weeks before the August coup attempt he had resigned his position and headed for Switzerland, where he took up a post at a trading firm named Seabeco that was the epitome of a KGB-backed ‘friendly firm’,[35] and that had sold vast amounts of raw materials from the Soviet Union. It was headed by a Soviet émigré named Boris Birshtein, who in the seventies had gone first to Israel and then to Canada, where he set up a string of joint ventures, including one with a leading light of Soviet foreign intelligence.[36] The KGB appeared to have its fingerprints all over Seabeco’s rise. ‘None of this could have happened without the patronage of the KGB,’ said Shvets.

When questioned, former KGB chief Vladimir Kryuchkov admitted that the trading firm had been created as a channel for the Communist Party’s funds. But he insisted again that the plans had never been implemented – there’d been no time before the collapse of the regime.[37] But telltale signs emerged of Seabeco’s continued association with the KGB. A taped telephone conversation between a Seabeco associate and a Russian foreign-intelligence chief was leaked, in which the two men openly discussed the trading network they’d set up.[38] This Seabeco associate, Dmitry Yakubovsky, went public with claims that Seabeco had received tens of millions of dollars to finance KGB operations in Europe.[39]

Any remaining chance the prosecutors might have of following the money trail, however, seemed to evaporate completely when Veselovsky disappeared from his post in Switzerland without a trace. Without adequate funding and only a scanty paper trail, the prosecutors soon ran into a brick wall. Inside Russia, they’d been able to trace the transfer of billions of roubles from Kruchina’s property department to more than a hundred Party firms and commercial banks.[40] But their attempts to recover any of it were simply stonewalled.[41]

The new Yeltsin government seemed to have little interest in finding any of the funds amid the chaos of the Soviet collapse. For one brief moment that seemed to change, when Yegor Gaidar, Yeltsin’s round-faced new reformist prime minister, announced with great fanfare that the government had hired Kroll, a top international investigations firm, to hunt down the Party cash. But, a $1.5 million contract and a year scouring the globe for the missing Party funds later, Kroll appeared to have made even less progress than the prosecutors had. Apparently, there was nothing to report. ‘They didn’t find anything,’ said Pyotr Aven, the government minister whose initiative it was to bring in Kroll in the first place. ‘They found nothing more than the accounts of a handful of top-level bureaucrats. They had no more than half a million dollars on the accounts.’[42]

The problem was, it seemed, that the government did not want the funds to be found. The reason Kroll came back largely empty-handed was that it received no assistance from the Russian government at all. The firm had been blocked from working with the Russian prosecutors. ‘The Russian government was not interested in us finding anything, so we did not,’ said Tommy Helsby, a former Kroll chairman who worked on the probe.[43] ‘All the government wanted to do was use our name in a press conference.’ It only wanted to give the impression that a real search was under way.

The task was made more difficult by the fact that, rather than through straightforward bank transfers, much of the wealth of the Soviet Union appeared to have been transferred, via friendly firms like Seabeco through the raw materials trade. Another big operator in these trades, said Helsby, was the controversial Geneva-based Glencore founder, commodities trader Marc Rich.[44]

The KGB foreign-intelligence operatives who had been behind the creation of the scheme now held the keys to the hidden wealth. ‘At the end, when the Soviet Union collapsed, when the music stopped, these KGB men were the men who knew where the money was,’ said Helsby. ‘But by then they were the employees of a non-existent Soviet state.’

Some of them, however, stayed on; fragments of the KGB’s foreign-intelligence networks were being preserved. Behind the scenes, amid the chaos, ‘some of them continued to manage money for the KGB’, Helsby said.

The night Nikolai Kruchina plunged to his death was the night the Communist Party’s wealth was transferred to a new elite – and part of it had gone to the foreign-intelligence operatives of the KGB. Some of the cash had already undoubtedly been stolen, squirrelled away by top Party bosses and organised crime. But the foreign-intelligence operatives were the men who controlled the accounts when Yeltsin signed the Soviet Communist Party into history. Kruchina may have been grappling with the despairing realisation that the men who handled the funds were no longer under his control. Equally, he may have been sent to his death by those same men, to make sure he could never tell.

‘Kruchina was most probably frightened that he could be asked where all the property had gone,’ said Pavel Voshchanov, a former spokesperson for Yeltsin and a journalist who spent many years investigating the Party’s stolen wealth. ‘Kruchina gave the orders, but now he didn’t know where it all was. The state was being destroyed. The KGB was being destroyed. And already no one knew where these KGB guys were – and who they were.’[45]

*

The story of the prosecutors’ search for the missing Party wealth was fast forgotten in the tumult of the collapse. But what the prosecutors found then was a blueprint for everything that was to come later. The smuggling schemes, the friendly firms and the trusted custodians became the model on which the Putin regime and its influence operations would be run. The fact was that parts of the KGB foreign-intelligence elite had begun preparing for a market transition ever since former KGB chief Yury Andropov became Soviet leader in 1982. In the early eighties a handful of Soviet economists had begun to quietly discuss the need for a move to the market, whispering in the privacy of their kitchens about the chronic inefficiencies of the Soviet economy and publishing underground treatises on the need for reform. At the same time, there was a growing realisation among a tight-knit group within the intelligence elite that the Soviet economy was in a death spiral, that it was impossible to maintain the empire of the eastern bloc, let alone run broader influence and disruption campaigns in South America, the Middle East and Africa, and in the West. ‘If you want to have a policy of being a great empire you should be able to spend a huge amount of money,’ said one person who worked closely with reform-minded foreign-intelligence chiefs in those days.[46] ‘It was not within our means to compete with the US. It was very costly and very difficult, impossible perhaps.’ Even before progressive elements within the KGB began tentatively preparing for a possible transition in East Germany, they’d been pushing for sweeping reform in the Soviet Union itself.

The Soviet economy was being drained of resources by the push to build up military production and compete with the West at the expense of everything else. The Communist state was, in theory, succeeding in delivering its socialist vow of providing all workers with free education and healthcare. But in practice the planned economy simply didn’t work. Instead there was a corrupted system under which the ordinary people the Communist state was supposed to protect lived largely in poverty. The Communist state could access plenty of natural resources for corrupt trading schemes, but it was failing to develop light industry to produce competitive consumer goods. There was no private ownership, or even any understanding of what profit was. Instead, the government handed down production quotas to each and every enterprise, controlled all earnings and fixed prices for everything. There was no motivation for anyone, and the system just didn’t work. Consumer goods prices were fixed at incredibly low levels, but because of this there were acute shortages of everything – from bread, sausages and other foodstuffs, to cars, televisions, refrigerators and even apartments. The shortages meant queues and rationing, sometimes for months on end. Informal connections and payoffs to officials were often the only way to jump weeks-long queues for the most basic necessities – for shoe repairs, for a hospital bed, for coffins and funeral rites. The overweening power of the Soviet bureaucracy had built corruption deep into the system, while under these conditions the black market flourished.[47]

In the late sixties black marketeers, known as tsekhoviki, began to set up underground factories in which spare parts and materials siphoned from the state-owned plants were used to produce goods outside the regulated economy. Such activities could result in jail sentences of ten years or more, but increasingly these factories’ output was becoming the only way to make up for at least some of the shortages of the Soviet planned system. Hard-currency speculators would trawl the halls of the Soviet Intourist hotels, risking prison to buy dollars from visiting foreign tourists at an exchange rate far more advantageous to the tourist than the fixed Soviet one. It was a good deal for the speculators, too. In the system of Soviet shortages, anyone with access to hard currency was king. Dollars would gain you access to the well-stocked Bereyozki shops reserved for the Soviet elite, where the shelves were crammed with the quality foodstuffs and other luxuries of the West. It would enable you to buy Western clothing, Western pop music, anything produced outside the stagnating and dreary Soviet economy – all of which could then be sold on for vast profits. The shortages in the Soviet economy ran so deep that, according to the former KGB foreign-intelligence operative Yury Shvets, everyone was for sale. Factory directors fiddled the books to give materials to the black marketeers in return for a cut of the profits. Law-enforcement officials turned a blind eye to the currency speculators marauding through Soviet hotels in return for bribes and access to the hotel buffet.[48] And at the top of the pyramid, ever since the seventies, the Party elite had been taking a cut of the smuggling and trading schemes. All of it undermined any efforts to improve production. ‘The Soviet Union could not even make a pair of tights or shoes,’ said Shvets. ‘Prostitutes would give themselves for one night for one stocking, and then the next night for the other. It was a nightmare.’[49]

New Day

When Boris Yeltsin, blinking in the sunlight, strode out of the Russian White House in the middle of the hard-line coup on the afternoon of August 19 1991, the world believed it had gained an icon for a new age. Defying the military hardware surrounding the White House, Yeltsin clambered stiffly on top of one of the tanks, shaking the hands of the soldiers manning its guns as he went.

In the euphoric days that followed, the symbol of the KGB’s overpowering might, a statue of the founding father of the Soviet secret police, Felix Dzerzhinsky, was winched away from its plinth in front of the KGB headquarters on Moscow’s Lubyanka Square. Western bankers and government officials were soon hurrying to Russia to advise Yeltsin’s new government on the creation of a market economy. The new cabinet was partly staffed with bright young economists, including Yegor Gaidar and Pyotr Aven. Russia was to integrate into Western markets, and a new era of cooperation was hailed.

Although in October 1991 Yeltsin signed an order abolishing the KGB and breaking it up into four different domestic services, his appointment of Vadim Bakatin to head the organisation in the final months before its break-up was an early sign that change was going to be cosmetic. Bakatin was an inexperienced outsider who’d served briefly as interior minister in the final years of the Soviet regime, and his new KGB comrades ran rings around him. He himself admitted to the Moscow journalist Yevgenia Albats that he had little control over his employees, and that he knew they were manipulating him and withholding information from him: ‘I am absolutely convinced that whatever the komitetchiki don’t want me to know, I won’t know,’ he told her.[81] And once the KGB had officially been broken up, under Primakov’s stewardship the powerful foreign-intelligence service, now renamed as the SVR, remained intact. Even though tens of thousands of apparently demoralised officers resigned from the service to join the rush into business, part of the system merely went underground. Like Putin with Sobchak, ‘they stayed in the shadows’, said one former intermediary for the KGB, speaking on condition of anonymity.[82] ‘They didn’t really get rid of anything. They changed the façade and they changed the name. But nothing else really changed.’ While officially the SVR’s budget was shredded, unofficial sources of funding were soon found.

Even though the Russian government was struggling in the chaos of the Soviet collapse to pay pensions and the wages of teachers, doctors and other state workers, the new prime minister, Yegor Gaidar, made sure to find funds to maintain strategic outposts for foreign intelligence. One such payment was $200 million in 1992 to Fidel Castro’s regime in Cuba for Russia’s foreign-intelligence service to continue to use its Lourdes listening station for eavesdropping on the US. The payment was made through a convoluted barter scheme, swapping oil products for sugar imports – exactly like the smuggling schemes deployed by the KGB through friendly firms.[83] The $200 million transfer was made at the same time as Russia’s official state budget for 1992 was $148 million. Later that year, Gaidar diverted an entire $1 billion loan from the International Monetary Fund, aimed at stabilising the Russian economy, to bail out one of the most important financial outposts of Russia’s foreign-intelligence network, Eurobank, the Soviet state bank in Paris.[84]

For the first half of the nineties, the KGB remained a potent force behind the scenes. Its operatives were still everywhere, employed as advisers for trade or government relations or as security chiefs. Until 1995, most of the oil sector remained in state hands, its exports watched over by the foreign operatives of the KGB. ‘You found this virtually everywhere, in all the companies, in all the government agencies,’ said Christian Michel. ‘Through their networks, they were a lot more than individuals. These men from the KGB controlled networks, and without them nothing would move.’[85]

At first, many of the senior KGB operatives involved in forging Russia’s market transition went to work for the young tycoons they’d helped create through Gorbachev’s perestroika reforms.[86] They were mostly there simply to take their cut, but in some cases they had control. ‘They said, “You’ll make money and kick it back to us,”’ said Yury Shvets, the former foreign-intelligence operative.[87]

But as the young tycoons gained wealth and power under the market reforms launched by Yeltsin’s government, gradually they began to eclipse their former sponsors in the KGB. A new Russia seemed to be emerging, in which the former Komsomol members became brash symbols of the new capitalist age. Khodorkovsky and his team from Menatep even issued a manifesto, issuing 50,000 copies of a screed handed out on the streets that proclaimed the virtues of getting rich: ‘Our compass is profit. Our idol is his financial majesty capital.’[88] Their goal was ‘to become billionaires’, and they wanted to demonstrate that there was nothing wrong with getting wealthy after decades in which making a profit was considered a crime. But they benefited from an inside track to riches from the start.

The market reforms of Gaidar’s new government aimed to bring the market to Russia as fast as possible – regardless of the consequences. They were encouraged by a team of American economists from Harvard led by Jeffrey Sachs, who hoped to emulate the success of so-called ‘shock therapy’ reforms in Poland, where two years before a rapid transition to the market seemed to have been successfully launched.[89] But in Russia, the legacy of the Soviet state weighed far more heavily. Gaidar’s market reformers were in a minority, and the corrupted system in which they launched the reforms only further warped the economy. Only those, like Khodorkovsky, who’d set up banks in the final years of the Soviet Union were in a position to benefit. For a while, however, the American economists seemed to go along with that. They believed they were helping create a new class of entrepreneurs, and seemed ready to do anything that would help break the hold of the Soviet old guard.[90]

When the Yeltsin government freed prices overnight on January 1 1992, lifting decades of Soviet controls, the young tycoons made money, while the population and the government struggled to survive. The price-freeing unleashed a devastating bout of hyperinflation, as suppliers and producers struggled to overcome the shortages long built into the Soviet economy. Unlike in Poland, where inflation had soon settled after an initial surge, Gaidar was contending with a wily old-guard central bank chief, Viktor Gerashchenko, who’d once worked at the pinnacle of the Soviet foreign-bank network funding the operations of the KGB, and who now continued to print money no matter what. Prices of consumer goods soared by 400 per cent, sometimes many times more. While the hyperinflation ravaged the government’s spending power, and wiped out what little savings the population had, Khodorkovsky and other young tycoons were able to hedge against devaluation. They could access hard currency through their banks, and were able to swiftly transfer any rouble income into dollars.

The tycoons also benefited from the next planned market reform of the Gaidar government, the privatisation of state enterprises. The only people with funds to participate in the so-called mass privatisations were the narrow elite who had already taken over much of the enterprises’ cash flows under Gorbachev’s perestroika reforms: the young businessmen from the Komsomol, the black marketeers, the organised-crime groups, the KGB and the state directors.

Privatisation at a time of hyperinflation could only further concentrate the country’s wealth in the hands of this small group, said Grigory Yavlinsky, one of Russia’s most principled economists, who’d argued strongly for more gradual reforms. ‘How is it possible to have privatisation when money has been wiped out as an institution? There can only be a criminal privatisation. The next step was criminal privatisation.’[91]

‘When Gaidar tried to conduct the first privatisations, everything had already been seized,’ said Gleb Pavlovsky, a former Kremlin adviser.[92] ‘Gaidar’s biggest mistake was that when he began his reforms he considered that what was before him was still the Soviet economy of 1987. But already the Soviet economy did not exist.’ The Gaidar government had sought to keep the privatisation process open to all, by giving plant workers vouchers to take part in the sell-offs. But the workers were often forced to exchange their vouchers for cash, or even for bread, just to survive the hyperinflation.

The new tycoons from the Komsomol benefited most of all when the Yeltsin government granted them access to deep stores of cash, without their having to lift a finger. Instead of having its own treasury, the government authorised the tycoons’ banks, including Khodorkovsky’s Menatep and Fridman’s Alfa, to hold strategic funds from the Russian budget on deposit. It was a get-rich-quick scheme for the chosen favourites of the Yeltsin regime. They could direct hundreds of millions of dollars in government funds into high-yielding investments, sometimes even into the privatisation auctions, while the government was left waiting for the disbursal of its funds. Vital programmes such as defence spending or aid for citizens half-abandoned in the crumbling industrial wastelands of Russia’s far north were delayed or simply unpaid, while the ruthless new bankers fobbed the government off with promissory notes. The government was being bled dry, while the new wolves of the Russian economy concocted elaborate schemes to avoid paying taxes or customs duties.

Faster and more adept in the ways of the market than their one-time masters in the KGB, the young tycoons from the Komsomol were becoming a sort of Frankenstein’s monster, fast outrunning the men who had made them. The real turning point, when control of the economy appeared to transfer irrevocably into the hands of the new tycoons, came towards the middle of 1995. Russia was entering the final year before the first post-Soviet presidential elections, and the government’s coffers were empty. Wages and pensions were months in arrears, and Yeltsin’s approval ratings were terrifyingly low, at 6 per cent. The tycoons feared a return to Communism, that would strip them of their fortunes and could even land them in jail. Even more importantly, they’d long been eyeing the crown jewels of Soviet industry, the state’s biggest industrial giants. What they’d acquired so far was small-scale compared to the vast resources still under the control of the state.

Vladimir Potanin, the smooth-talking son of a senior Soviet diplomat, who’d become one of the country’s major new bankers, concocted what seemed an ingenious scheme. He proposed that the young bankers offer to help out the cash-strapped Yeltsin government with a series of loans. As collateral, the tycoons would take stakes in a select handful of the nation’s biggest enterprises. The tycoons would manage the enterprises, and could sell off their stakes if the government was unable to pay the loans back. When the idea was first floated, outside observers scoffed that it would never gain any traction. The potential for corruption, they said, was too great.[93] It would be too easy for the bankers simply to sell the stakes to themselves.

But the young tycoons had powerful friends in the Yeltsin government. Prime among them was Anatoly Chubais, the red-haired deputy prime minister and close Gaidar ally who’d been the architect of the privatisation programme so far. With strong support from the team of US economists, Chubais had been intent on breaking the hold of the state over the economy at any cost. Too much of industry was still in the hands of the state, of ‘red’ Soviet-era directors and the KGB, while the threat of a return to Communism seemed all too real. If the government signed off on the bankers’ proposal, it would create a major new class of property owners overnight, as well as filling empty government coffers with a proposed $1.8 billion in loans. The tycoons would then back Yeltsin to the hilt against the Communists to preserve their new wealth. Chubais believed it would signal a final victory for liberal reformers over the forces of the old guard.

But the scheme would become one of the original sins of Russia’s market transition. It tainted everything, and opened the way for constant threats over the legality of the property the young tycoons acquired at that time. It became known as the loans-for-shares privatisations, an insider deal that transferred the nation’s resource wealth into the young bankers’ hands at a knockdown price. Far more financially nimble, and able to access much bigger pools of ready cash through the rapid growth of their banks and the government deposits they held, the young tycoons outmanoeuvred their former KGB masters. The combined forces of the KGB and the former Soviet directors managed to win only two of the auctions for stakes in oil companies: 5 per cent of an oil firm named Lukoil, and 40 per cent of Surgutneftegaz, whose managers went to great lengths to keep the young bankers away. The nearest airport to the Siberian oil town of Surgut, where the sale was being held, was shut down, and armed guards manned roadblocks across the main routes in.[94]

Most of the rest of Soviet industry passed into the hands of the young bankers, in auctions that were widely seen as rigged. Potanin won the prize he’d long coveted – a controlling stake in the world’s biggest producer of nickel and platinum, Norilsk Nickel, a sprawling plant high above the Arctic Circle whose profits in 1995 stood at $1.2 billion. He’d done so by extending a loan of just $170 million to the government – and when, as expected, the still cash-strapped government defaulted on the loan after Yeltsin secured his election victory, the way was clear for Potanin to win the stake in an auction for little more than the loan price. Khodorkovsky had long been targeting Yukos, an oil producer in west Siberia which controlled some of Russia’s largest reserves. He took control of it after lending the government $159 million for a 45 per cent stake, and then paying a further $150 million in investment for an additional 33 per cent. Another oil giant, Sibneft, was won for $100 million by Boris Berezovsky, who already controlled sales at Russia’s biggest carmaker and chaired a bank of his own. Most of these bankers were still barely in their thirties, but with the help of sympathetic government officials running the auction process, they were able to secure the foundations of fortunes that within a few years would be worth billions, and then tens of billions, of dollars. Berezovsky was soon crowing that a group of seven bankers controlled 50 per cent of the nation’s economy.[95]

The loans-for-shares auctions marked a huge shift in the control of the economy. It was the moment the tycoons were transformed from mere bankers to owners of the biggest assets in the country, with access to some of the most lucrative cash flows. ‘This is when they started to reinvent themselves,’ said Christian Michel. ‘They acquired real assets. They became much more than banks.’[96]

By the end of the nineties, the young tycoons were starting to turn around the Soviet legacy of falling production, deep debts and neglect. But for the members of the security services that had helped create these new billionaires, the loans-for-shares auctions was a moment they would never forgive or forget, and would be the kernel for the KGB’s later revanche. Before then, in the shadows, the KGB men had still been able to control much of the cash flow from the nation’s oil wealth. But now they’d been outwitted and outpaced, and the financial reins had largely been taken out of their hands. ‘This was the turning point when [the young tycoons] took control,’ said Rair Simonyan, the ally of Yevgeny Primakov who’d worked on the early perestroika reforms. ‘It changed the entire paradigm.’[97]

But in those days, the tycoons of Russia’s new order were giddy at their new wealth. They were fast becoming oligarchs who held considerable sway over the weakened Yeltsin government. The remaining members of the old-guard security services who had served in government had been ousted amid scandal in the run-up to the presidential elections, and Western-leaning reformers like Chubais had been left to take the lead. Fresh from his successful engineering of the loans-for-shares sell-offs, Potanin took a post as Yeltsin’s deputy prime minister, while Berezovsky was appointed secretary of the Security Council. Chubais became Yeltsin’s chief of staff. It was the apotheosis of their era. The country, it seemed, was theirs. The forces of the KGB appeared to be receding into the background.

But, said the former senior foreign-intelligence operative Yury Shvets, the oligarchs ‘all forgot to whom they owed a debt’.[98] In the rush to shore up their positions, in the battle to accumulate more wealth, Khodorkovsky and the others didn’t notice that nearby, in St Petersburg, there was a chill in the air. Things were being run differently there. Isolated from the goldrush of Moscow’s economic boom, the forces of the KGB were exerting far greater control, in a city where the economy was tougher and darker, in the violent scrabble for cash.

3
‘The Tip of an Iceberg’

ST PETERSBURG – On the south-western edge of St Petersburg, where the Gulf of Finland starts to join the Baltic Sea, a tangle of cranes and containers juts out across the elegant façades of the pre-Revolutionary palaces across the bay. On one small island, twisted heaps of scrap metal and piles of timber lie in wait for tankers, while across a channel the red-brick buildings that were once the customs house and the warehouses for the city’s finest pre-Revolutionary merchants somehow still stand, half-abandoned among the heavy machinery. Far out on the western edge, a concrete jetty leads to the place sometimes called the ‘Golden Gates’, a concrete sprawl of oil-storage facilities that mark St Petersburg’s most strategic outpost, the oil terminal that was the battleground for some of the 1990s’ most vicious bandit wars.

The archipelago of islands is home to St Petersburg’s sea port, and through its channels Russia’s tumultuous history has always run deep. When Peter the Great founded St Petersburg in the early eighteenth century, he did so in the hope that it would become Russia’s greatest sea port, a vital link between the vast country’s Eurasian land mass and the markets of the West. Thousands of serfs toiled and died to realise his vision of stately Baroque mansions and elegant canals rising out of the freezing and muddy marshes. St Petersburg was always intended as Russia’s ‘window on the West’, a port city that would drag the country kicking and screaming out of its medieval and Asiatic past, no matter what the cost.

Ships carrying cargoes of cloth, tea, silk and spices began to arrive in ever greater numbers from the colonial empires of the West, while Russia’s imperial riches of timber, furs, hemp and potash steamed out. St Petersburg’s merchants and noblemen thrived, but as the city’s population exploded, its workers were among the world’s most downtrodden. Dockers hauled cargoes on and off the ships on their backs, unprotected from the ice and bitter winds that gripped the port for half of the year. When Vladimir Lenin gathered the city’s workers to overthrow the rule of the provisional government in 1917, the dockers were foremost among them. When the city, by then named Leningrad, came under blockade by the Nazis during the Second World War, the sea port was on the front line of the heart-rending struggles to survive starvation and bombs.

And when Russia juddered out of its third revolution of the twentieth century, the St Petersburg sea port again had a defining role to play. It became the ground zero for an alliance between the KGB and organised crime that was to expand its influence across Russia, and later into Western markets and institutions too. It was the starting point for the business alliances of the city’s deputy mayor, Vladimir Putin, who worked closely with the organised-crime leader who ran it, and the oil trader who gained a monopoly on exports through its oil terminal. The relationships forged then, through an elaborate web of barter and export deals, became a model for how Putin’s Russia would be run.

In the early nineties, the port was one of the darkest places in a city riven by gangland shootings and violent battles for cash. ‘The story of the sea port is a very criminal and dirty story,’ said one former senior official in the St Petersburg city council.[1] ‘The port was totally criminalised. There was a lot of shooting,’ according to a former member of the biggest local crime gang, the Tambov group.[2]

The group who eventually took it over were part of a nexus of organised-crime and KGB men that came to rule the roost in St Petersburg in the nineties, and Vladimir Putin was at the centre of it. If in Moscow the forces of the KGB had stayed largely in the shadows, in St Petersburg they were much more visible. St Petersburg’s economy was far smaller than Moscow’s, the battle for cash much more vicious, and the mayor’s office had tentacles extending into most businesses. The main reason for the potency of the KGB’s reach in St Petersburg was that mayor Anatoly Sobchak had little interest in the day-to-day running of the city. He left it to Putin, who ran the foreign-relations committee, which oversaw all trade and much of the rest of the city’s business, and to his other deputy, Vladimir Yakovlev, who was in charge of the city’s economic affairs.

Sobchak and his deputies moved the mayor’s office from the Marinsky Palace, where St Petersburg’s democrat-run city council had its seat, to the warren-like offices of the Smolny Institute, from which the Communist Party had run the city since the days of Lenin’s takeover. The legacy they inherited was desperate. The city’s coffers were empty. There was no cash to pay for imports, and the shop shelves were fast emptying. Domestic food production was in a parlous state. Grain was left to rot at the roadside by inefficient state collective farms, while a series of bad harvests made things even worse. They not only had to deal with the food crisis, but also with an explosion of crime. In the chaos of the Soviet collapse, the institutions of power appeared to be melting away. Organised-crime groups moved in to fill the vacuum, running protection rackets extorting local businesses and taking over trade.

From his office behind the stately columns and fading façade of the Smolny Institute, Sobchak seemed incapable of dealing with the deteriorating situation. He was a convincing and powerful orator who prided himself on his appearance, but his relations with what remained of the city’s law enforcement were fraught. ‘Sobchak was a moron,’ said one former senior KGB officer who worked for a time with Putin in St Petersburg. ‘He wanted to wear the sharpest suits, and he could give speeches for hours on end. He loved all the attributes of power, and his wife wanted to live like an aristocrat. He liked to travel in limousines, but someone needed to work. Who was going to clean the shit from the streets and deal with the bandits?’

Few in law enforcement would even take Sobchak’s calls. ‘The former chairman of the St Petersburg KGB would not even go into a room with him,’ the former KGB officer said. ‘If you tried to explain to him how security worked, it would be the same as explaining nuclear physics. But with Putin, you could explain. You could say, “Volodya, there is this situation and there is this one.” And when he had to phone up the police to sort out situations, for him they would not put down the phone.’

So Sobchak came to rely on Putin, who had maintained a network of connections with the top of the city’s KGB: his former mentor in the Leningrad KGB’s feared dissident-fighting Fifth Directorate, Viktor Cherkesov, was the new head of St Petersburg’s FSB, the KGB’s successor agency. Putin became the point man for dealing with law enforcement. He ‘was someone who could phone someone and say, “We have to do something, otherwise there’s going to be a nightmare,”’ the former KGB officer said. ‘He could agree with a general who before had handled special forces, who could tell him how to handle something and maybe provide back-up. They were people with connections. The system had collapsed, but part of it had remained.’[3]

What emerged out of the chaos and collapse – and Sobchak’s ineffectiveness – was an alliance between Putin, his KGB allies and organised crime that sought to run much of the city’s economy for their own benefit. Instead of seeking to impose order for the good of the city’s population, the only order they imposed was mostly for themselves. Above all, the collapse meant opportunity for their own enrichment – and, in particular for Putin and his allies in the KGB, for the creation of a strategic slush fund that was to preserve their networks and secure their position for years to come. The slush fund had its roots in the barter schemes of KGB-run friendly firms. Later they extended to the sea port, and then to the oil terminal itself. Running through it all was St Petersburg’s Tambov organised-crime group. It was a business, according to one former local FSB officer, that consisted of ‘murder and raiding’: ‘The arms of the Tambov group were covered in blood.’[4]

*

It was near the end of 1991 when Marina Salye first noticed something was wrong. The firebrand democrat, who at one point had rivalled Sobchak as St Petersburg’s democratic leader, had been tasked by the head of the city council to find ways out of the food crisis. A doughty geologist in her mid-fifties with soft greying hair and shadows sunk deep under determined eyes, Salye was relentless. That autumn, she’d successfully pushed for the city to introduce a system of ration cards. It was the first time food had been rationed since the terrible days of starvation of the Leningrad blockade.[5] She’d now decided to push for a barter scheme that would allow the city to exchange raw materials for imports of food. It seemed the only way out of the impasse. A system had already been set up on a federal level to deal with the crisis that was facing the entire country. The Moscow government had begun issuing quotas that allowed the export of set quantities of natural resources held by state-owned enterprises, such as oil products, metals and timber, in exchange for food. But as Salye began to push the mayor’s office to apply for the export quotas for St Petersburg, she got wind of rumours that Putin’s foreign-relations committee had already been granted them. ‘What quotas? Where are the quotas? Officially no one knew anything,’ she later told an interviewer.[6] When she tried to extract more information from the mayor’s office, no one answered her letters. The scheme, she found out, had been under way since at least the beginning of December, and no one had been informed.[7] The biggest problem of all was that the expected food imports were nowhere to be found. As the city entered the new year, it had only one month’s worth of food reserves left.[8]

Salye launched a parliamentary inquiry demanding information on the deals.[9] When Putin eventually bowed to demands and addressed the city council, pale-eyed and defiant, he turned up with just two pages of notes, and told the MPs that everything else was a commercial secret.[10] What he told parliament differed greatly from the documents Salye was eventually able to retrieve from the State Customs Committee and other officials as she ramped up her investigation.[11]

By the time she’d pieced everything together, it had become clear that Putin’s committee had handed out more than $95 million in export licences to an obscure web of front companies, while virtually none of the food imports expected in return had arrived.[12] A further $900 million worth of export quotas had been granted by the federal government, including one for $717 million worth of aluminium.[13] It was impossible to tell whether Putin had gone ahead and handed out the additional $900 million in quotas to other firms which also disappeared with the proceeds, as Salye had been unable to access any further documentation. But she suspected that he had.[14]

As Salye and her deputies dug through the paperwork, the scandal seemed to grow. State customs officials and St Petersburg’s representative from the foreign trade ministry had written to Putin complaining that he’d issued the export licences in violation of laws governing such barter deals.[15] An expert opinion commissioned by Salye’s committee warned that the companies involved were so obscure they could disappear with the proceeds from the sales overnight.[16] Most of them were to receive mind-blowing commissions for their services: 25 to 50 per cent of the value of the deals, instead of the usual 3 or 4 per cent.[17] A handful of the contracts appeared to allow the companies to purchase raw materials for far less than the market price. One quota awarded by Putin allowed for an outfit created just two months before the scheme took off to acquire 13,997 kilograms of rare-earth metals for two thousand times less than the global market price, enabling it to reap vast profits when it sold it all on world markets.[18]

The scheme Salye had uncovered was almost identical to the practices deployed by KGB joint ventures in the dying days of the Soviet Union, which had led to a flood of raw materials being siphoned out of the country from state-owned enterprises at the low internal Soviet price, while the profits from the subsequent sales at much higher world prices remained in bank accounts abroad. In those days, any outfit that wanted to export raw materials had to receive a special licence to do so from the ministry of foreign trade, whose ranks were mostly manned by associates of the KGB. When the Russian government launched a series of barter schemes intended to staunch the looming humanitarian crisis following the Soviet collapse, the deals followed a similar route. But Putin had special permission to award his own quotas, licences and contracts for the city’s so-called oil-for-food deals, bypassing the need to agree each one with the ministry.[19] He’d been granted this by the minister for foreign trade himself, Pyotr Aven, the same bespectacled economist who’d worked closely on reforms with Gaidar in the early eighties, and who then protected Putin when the oil-for-food deals came under scrutiny.

One of the contracts Putin handed out was to a Soviet-Finnish joint venture called Sfinks, which at the end of December 1991 was awarded a quota to trade diesel fuel, cement and fertiliser in exchange for 200,000 tonnes of livestock grain.[20] Another was a Soviet-German entity named Tamigo, given a licence to trade five hundred tonnes of copper in return for supplies of sugar and cooking oil.[21] Dzhikop, the outfit that was awarded the contract to acquire 13,997 kilograms of rare-earth metals for two thousand times below the market price,[22] was co-run by the brother of one of Putin’s university classmates who shared Putin’s love for martial arts.[23] Another recipient of diesel oil quotas was a firm called Interkommerts, run by Gennady Miroshnik, a convicted criminal who’d participated in a scheme that siphoned 20 million Deutschmarks from funds earmarked for the relocation of the Soviet Union’s armed forces from East Germany.[24] Later, Putin’s wife Lyudmilla told a friend that Interkommerts was linked to East Germans her husband met in Dresden.[25]

The barter deals ‘were handed out to his friends,’ said Alexander Belyayev, the then head of the St Petersburg city council who oversaw Salye’s investigation.[26] ‘They had to be given to people Putin trusted. There was no legal tender process then, so it was clear they would be given to people he knew personally, to people he could control. For the oil-product sales, this was mostly connected to Kirishi. They were near monopolists. This was Timchenko, Katkov, Malov.’[27]

The men Putin was apparently handing the deals to appeared to represent far more than a network of friends. One of them, Gennady Timchenko, was a spry man with a charming smile who was fluent in German and English, with a smattering of French. He and his partners, Andrei Katkov and Yevgeny Malov, had set up the Kirishineftekhimexport oil trader when Gorbachev first loosened trade in 1987, granting seventy organisations, including the Kirishi oil refinery near Leningrad, the right to trade outside the Soviet monopoly.[28] All Katkov and Malov had done at their previous posts in the Soviet foreign trade ministry was stamp and file papers for export deals, and they leapt at the chance to enter into their own business. Timchenko appeared to be a different matter. His official biography said he’d worked as a senior engineer at the foreign trade ministry. But according to three people familiar with the matter, he’d taken a very different route. He’d studied German together with Putin at the KGB’s Red Banner Academy before Putin was sent to Dresden and Timchenko to Vienna and Zürich,[29] where, two former senior officers for the Russian foreign-intelligence service said, he had worked as an undercover agent in Soviet trade organisations.[30] It’s possible, according to a third former officer speaking to Russian newspaper Vedomosti, that he was sent there to handle bank accounts funding the KGB’s networks of illegals.[31] ‘I don’t rule out that Timchenko knew Putin then,’ one of the former officers archly told me.[32] Timchenko has repeatedly denied any connection to the KGB, saying any such connection is untrue. A senior Russian banker with ties to the security services also indicated he had links to Putin during his Dresden days.[33]

While Timchenko has also previously denied that his Kirishineftekhimexport had ever been involved in the scandal-racked oil-for-food deals, adding later that all his firm’s activities were ‘transparent and legitimate’, one of Timchenko’s former partners told me his firm had participated, as did two other associates. They insisted that all the food they’d been tasked with importing had been delivered to St Petersburg.[34] But overall, the scheme ended disastrously: only a tiny fraction of the food due to be imported had ever turned up. Instead, Salye suspected, KGB networks were being preserved. Salye told a friend she felt her inquiry had uncovered ‘the tip of an iceberg’.[35] What lay beneath, she believed, was a huge structure that had its origins in the foreign slush funds of the KGB, the networks of which the scheme was designed to maintain.

Salye, it turns out, was probably right.

*

‘Salye was a fool! This all happened. But this is absolutely normal trading operations. How can you explain this to a menopausal woman like that!’[36] It was May 2013, more than twenty years since the scheme was set up, and Felipe Turover, a former senior officer for the foreign-intelligence directorate of the KGB, was telling for the first time the story of how he helped Putin set up the St Petersburg oil-for-food scheme.

We were sitting in the sun on the terrace of a café in Boadillo del Monte, a sleepy market town in the hills near Madrid. The scheme that had been publicly presented in the early nineties as a mechanism to bring in vitally needed imports of food, Turover claimed, actually had a different purpose. It was never really intended that the food would arrive. There were much bigger problems to deal with: ‘All this bullshit about the report of Marina Salye. This was absolutely beside the point. The situation was one of total collapse. There was an absolute lack of federal finance for projects, and Moscow only drank and stole. In order for everything not to collapse, we had to do something. It was like a ship without a captain, and when you try to turn the wheel it falls off. This was what it was like. If we had not started work, then St Petersburg would have drowned in shit.’

Built like a bodybuilder, with a shaved head and dark glasses, Turover had a demonic laugh and a treasure trove of stories about the Soviet collapse. He was from the elite of the Soviet foreign-intelligence service. His father had taught languages at the KGB Red Banner Academy, and served as a translator to Leonid Brezhnev; Giulio Andreotti, the long-serving Italian prime minister, was among his friends. In Soviet times Turover had worked closely with Vladimir Osintsev, the legendary komitetchik who headed the so-called ‘Party Technology’ division of the Central Committee’s International Department, running black operations and illegals deep into countries where the Communist Party was banned. In the chaos that followed the Soviet collapse, Turover had been charged with finding ways to pay debts owed to the ‘friendly firms’ at the heart of the clandestine financing schemes of the KGB and Party influence operations abroad – many of which also supplied crucial equipment, including for energy infrastructure, to the Soviet Union at a marked-up price.

The problem was that when the USSR collapsed, Russia had agreed to take on all the foreign debts of the former Soviet republics in exchange for their foreign property, and had then promptly pronounced itself bankrupt. An international moratorium had been announced on all Russia’s foreign debts. Turover, who needed to bypass this in order to pay the friendly firms without anyone finding out, claimed that the barter schemes were in fact set up as a way to do so. Eventually he’d set up a channel for payments through a small Swiss bank in Lugano, documents show. ‘We could not say we paid someone and did not pay Philip Morris,’ he said. ‘This was not a small matter. For some things we needed to pay right away. If we did not pay for equipment for nuclear power plants, then we would have a catastrophe. When the country stopped existing, everyone had stopped supplies.’

Turover had been sent to St Petersburg, he said, to help Putin set up his own scheme to pay off debts to some of the friendly firms. One of them, he claimed, was an Italian outfit called Casa Grande del Favore, which he said was one of a handful of engineering firms capable of the delicate operations required for repairs of the sewerage system that criss-crossed St Petersburg’s myriad of canals: ‘We had to pay, because without completion of the work St Petersburg would be covered to the tops of its cupolas in crap.’ He’d advised Putin to set up the oil-for-food scheme, he said, because ‘We needed to have operative instruments to be able to pay someone off fast.’[37]

Turover was essentially admitting that from the start the scheme had been intended not to bring in imports of food, but to create a hard-currency slush fund for the city. But without any oversight, there was no way of telling whether any of the funds were actually used to pay off the debts to the friendly firms, or whether they were in fact funnelled to networks of KGB agents still operating abroad. Turover claimed that there was no other way to operate, because the Russian state bank in charge of foreign operations, Vneshekonombank, was in a state of collapse. All of its accounts had been frozen January 1 1992, when the Russian government announced it had run out of funds. ‘It was a pure necessity,’ said Turover. ‘It was not possible to pay the expenditures of the city any other way.’[38] Any hard-currency accounts officially connected to City Hall would be frozen, along with the other accounts impounded under the Soviet bankruptcy: ‘If they’d kept it on the accounts of the city, it would mean the same thing as keeping the cash in VEB. But if you had funds somewhere in foreign accounts, in Liechtenstein, then you could pay immediately.’[39]

Russia’s central bank had used the same reasoning when it tried to explain away a scandal that emerged later in the nineties, when it emerged that it had transferred tens of billions of the country’s hard-currency reserves through a small offshore firm in Jersey named Fimaco, which had been established in November 1990, shortly after Ivashko ordered the creation of the ‘invisible Party economy’. The secret transfers through Fimaco, the Russian central bank chief later argued, had been necessary to protect the funds from being seized after the Soviet Union pronounced itself bankrupt, and to pay off the foreign debts of the Soviet international banking network.[40]

But there was zero oversight over any of the transactions, and rather than paying down debts, many suspected most of the money was used to fund the foreign networks of the KGB. In many ways, the central bank’s Fimaco operations and Putin’s oil-for-food scheme were cut from the same cloth. They looked to be part of the black cash of the Russian regime, and were so lacking in transparency that they could just as easily be used as the personal slush funds of the officials running Russia. Turover insisted that Putin never stole from the slush funds he helped create through the oil-for-food scheme. ‘But he spent money, of course. Of course he spent some of the money, and somehow managed this money, because he needed to travel, to pay for hotels, and he probably needed to eat as well.’[41]

In essence, what had been created was what in Russian criminal parlance is called an ‘obschak’, a common cash pot or slush fund for a criminal gang. It was a model based on handing out riches to a tightly controlled network of close allies, where the lines between what was to be used for strategic operations and what was for personal use were always conveniently blurred. This model became the basis for the kleptocracy of the Putin regime, and later its influence operations too – and it was based on the clandestine networks and payments systems of the KGB.

As for Salye, she was sidelined as a political figure. Sobchak blocked any further investigation of his young protégé’s oil-for-food deals. In the mid-nineties she moved to Moscow, where her voice was drowned out in the capital’s political din. On the eve of Putin’s election as president, however, she resurfaced to publish the first in-depth investigative article on the deals, titling it ‘V. Putin – The President of a Corrupt Oligarchy!’ Although her findings created a furore among liberals, they had little impact nationwide. Soon after the election she withdrew to the depths of the countryside near the border with Finland, miles down a boneshaking road from the nearest town. Only a handful of journalists made the journey to interview her there. But the scheme, and her investigation of it, remained her abiding obsession till the day she died, just weeks after Putin began his third term in 2012. She knew she’d glimpsed the true nature of his regime in those deals.[42]

Submariner, Soldier, Trader, Spy

The KGB men who took over St Petersburg with Putin were far more commercially minded than the generation that had gone before. Though they mourned the collapse of the Soviet empire, many in the younger, middle echelon of the security services like Putin had fast embraced the tenets of capitalism and rejected the dogma of the Communist Party. For this new generation, it had been Communism that failed the empire, leaving them high and dry in Afghanistan and abandoning them in East Germany. ‘They saw Communism as having betrayed them,’ said Andrei Illarionov, the former presidential economic adviser to Putin.[43] They were the product of the operations the KGB launched in the final years of Soviet rule to create networks of foreign firms. The secrecy surrounding these activities meant that from the beginning, the methods of the KGB men of the eighties resembled money-laundering operations.

Once the oil-for-food scheme was done, Putin’s allies began to move in on the sea port, which initially together with the oil terminal and a fleet of ships was part of a vast state holding company known as the Leningrad Baltic Sea Fleet, or BMP. For the St Petersburg KGB men, the BMP had long been a strategic asset and the story of how Putin’s people took it over is inextricably bound up with the forging of an alliance between Putin’s City Hall and the city’s most notorious organised-crime group, the Tambov group. In Soviet times, the KGB had manned the fleet’s ships as trade aides to the captains.[44] They knew intimately its trade routes, its cargoes, the contraband and the money to be made. In its heyday, hundreds of ships had set out from Leningrad carrying oil products, metals and grain, while others arrived from as far away as South America carrying fruit, sugar and smuggled goods, vital for underground operations and cash. In those days, the BMP represented the city’s most strategic cash flow. Even in 1991, the year of the Soviet collapse, its net profits were in the hundreds of millions of dollars.[45] It was not only the owner of nearly two hundred passenger and cargo ships, it also controlled the entire Leningrad sea port, including its oil terminal, as well as the neighbouring ports in Vyborg and Kaliningrad. It was the key to the city’s wealth.

The man who ran the Baltic Sea Fleet at the time of Yeltsin’s revolution, Viktor Kharchenko, was an avowed liberal who under Gorbachev’s perestroika reforms had won the government’s permission to carve out the company as his own fiefdom. Square-jawed and built like a tank, Kharchenko had become increasingly independent. He’d risen from a childhood spent in an orphanage to become one of the city’s most revered businessmen. In 1990, under his watch, the BMP became an enterprise he rented from the state, which kept 50 per cent of its profits for reinvestment.[46] He’d grown close to Yeltsin, and when the Communist regime collapsed in the wake of the failed August putsch, he unceremoniously kicked all the KGB men out of the fleet.[47]

Kharchenko was carving out a separate power base just at the time the St Petersburg KGB men most urgently wanted to keep control of the cash flow. In the chaos of the Soviet collapse, and with organised-crime groups also trying to get a piece of the port and the oil terminal, it took over a year for them to exact their revenge.

One of the first moves was made quietly. Late one evening in February 1993, Viktor Kharchenko was returning home from a meeting with Yeltsin in Moscow when police stopped the Red Arrow train he was travelling on just outside St Petersburg. He was hauled off the train, charged with siphoning $37,000 out of the Baltic Sea Fleet, and jailed.[48]

Kharchenko was released on bail four months later, but he was removed from his post in charge of the BMP. The St Petersburg KGB men installed their own director, sold off the fleet of ships one by one and transferred them to a myriad of offshore companies. In the process, one of the BMP’s directors was shot dead.[49] ‘It was a real raider attack,’ said one of Kharchenko’s associates. ‘They sold off the ships for nothing. Everything disappeared. They siphoned everything out of the country.’[50]

Kharchenko’s former associates still fear to speak of what happened back then, or about who was behind the attack. But the footprints of the local KGB men were everywhere. ‘They needed to clean their boots and eat,’ said one. ‘They didn’t pay attention to anyone. They just took BMP and looted it.’[51]

The raid was a foretaste of operations that were to come later. The KGB men had bent St Petersburg’s law enforcement to their will to take over the city’s most important trading link. Kharchenko had been removed as BMP chief at a crucial moment. At the same time, the port and the oil terminal were being carved out from the Baltic Sea Fleet into separate entities, and privatised by Putin’s City Hall. ‘They pulled out the harbour walls from BMP,’ said a former Kharchenko associate.[52]

Submariner

As City Hall began to privatise part of its stake in the sea port, Ilya Traber, an alleged St Petersburg mobster later named by Spanish prosecutors as an associate of the Tambov organised-crime group, was quick off the mark.[53] His men bought up shares from the port’s workers, who’d received them as vouchers, as soon as the sell-off began. The process was violent. ‘There were huge violations in the privatisation of the port. But all this was covered up,’ said a former Traber associate.[54] From the beginning, Traber seemed to have an inside track. On paper, the state retained a 49 per cent stake in the port: 20 per cent through the federal property ministry, and 29 per cent through St Petersburg’s City Hall. But a clerk at the City Hall Property Department somehow lost the City Hall voting rights to the 29 per cent stake through a ‘mistaken’ stroke of a pen, leaving Traber and his associates free to do as they wished.[55]

‘The raider takeover would not have happened without help from the mayor’s office,’ said a former city FSB officer.[56] After a series of violent struggles, Traber, who’d become the quintessential intermediary between the St Petersburg KGB men and the Tambov group, established control over the oil terminal too.[57] He’d first arrived in Leningrad in the early eighties, as an ex-officer from the Soviet nuclear submarine fleet. A squat and burly man with a thick neck and close-set eyes, he’d washed up at a city-centre bar named Zhiguli,[58] a favourite haunt of Leningrad’s street thugs and budding black marketeers. Traber worked there as a barman and administrator, and in the bar’s dark reaches he began to trade in hard currency, and then in the city’s rich collection of tsarist-era antiques. He soon cornered the market, earning himself the nickname ‘Antikvar’. By the end of the eighties he was moving his business out of the black market and into the light, setting up the city’s finest antiques store on Nevsky Prospekt. There he established ties with St Petersburg’s newly-elected mayor Anatoly Sobchak and his wife Lyudmilla Narusova, who became frequent customers, forging a close friendship with Traber that was to last long after Sobchak’s time in office.[59]

Traber had always worked closely with the city’s KGB, without whose assistance it wouldn’t have been possible for him to smuggle antiques. ‘It was clear he had deep ties with the city’s law enforcement,’ said a former senior official from the city parliament.[60] He was also ‘in business with the Tambov group’, said a former FSB officer who worked in the St Petersburg contraband division.[61]

Soldier

At that time, the Tambov was becoming the city’s most powerful organised-crime group. Its leader, Vladimir Kumarin, had served time in jail in 1991 following a violent battle with another of the city’s mafia groups. After he emerged from prison, with the help of Putin, Traber and his men, the Tambov began taking control of St Petersburg’s entire fuel and energy business. The battles with rival gangs continued: in 1994, Kumarin lost one of his arms in a bomb attack. By that time, however, he was creating the St Petersburg Fuel Company, or PTK, which became the city’s monopoly domestic oil distributor, while Ilya Traber was taking over control of the sea port and the oil terminal on the Tambov’s behalf.[62] (Later, Spanish prosecutors described Traber as a co-owner with Kumarin of PTK.[63]) Kumarin became so powerful that he was known as St Petersburg’s ‘night governor’. In essence, he was the dark side of City Hall.

Putin seemed to be central to these manoeuvrings, the point man providing logistical support from the mayor’s office. Together with his trusted deputy Igor Sechin, who towered over a lectern in an anteroom outside Putin’s office vetting all who entered, he was the one who issued the licences that allowed Traber to control the port and the oil terminal. He was the one who granted Kumarin’s PTK an exclusive contract to supply fuel for the city’s ambulances, buses, taxis and police cars.[64] The first sign of his cooperation with the Tambov group came late in the summer of 1992, when his Foreign Relations Committee registered a Russo–German joint venture, the St Petersburg Immobilien Aktiengesellschaft, or SPAG, for investing in the city’s real-estate business. Much later, German prosecutors would allege that SPAG was a vehicle for laundering illicit funds for the Tambov group, as well as for a Colombian drugs cartel.[65] During his stint as St Petersburg’s deputy mayor, Putin served on SPAG’s advisory board. The Kremlin said this was no more than one of many such ‘honorary’ positions he held as deputy mayor. But one of SPAG’s co-founders said he met Putin five or six times to discuss SPAG’s St Petersburg business.

Trader

For Gennady Timchenko, the alleged former KGB operative who’d apparently known Putin since their days studying spycraft together at the Red Banner Academy, gaining access to the oil terminal had also always been key. He prided himself on his powers of persuasion and, in later interviews, he’d often explain his success with a nod and a wink about his ability to sell anything to anyone.[66] Since childhood he’d been part of the Soviet elite. His father held a senior rank in the armed forces, and he spent some of his early years in East Germany. His knowledge of German helped secure him a job in Soviet foreign trade and, according to former associates, propelled him into the ranks of the KGB, where he allegedly worked undercover as a trade representative in Vienna and Switzerland. Through his connections he forged a partnership with a former senior KGB officer, Andrei Pannikov, a thick-set man with a broad grin and hands as big as dinner plates. Pannikov had studied offshore finance at the Soviet Trade Institute, and then, with the blessing of the KGB’s foreign-intelligence chief Leonid Shebarshin, set up the first joint venture to be licensed to export oil products outside the Soviet monopoly.[67] Timchenko’s Kirishineftekhimexport oil trader formed a partnership with Pannikov’s Urals Trading – and for a time, from 1990, Timchenko headed Urals’ branch in Finland. According to a report by French intelligence, the company had initially been set up by the KGB in the eighties as part of a network of firms to transfer assets for the Communist Party[68] – a claim Timchenko denied.

Even with all their connections, for at least two years Timchenko and Pannikov were unable to gain access to the St Petersburg oil terminal.[69] Not only was it part of Kharchenko’s fiefdom, but as the power of the Soviet Union fractured, it became a vicious battleground for the city’s warring criminal groups. The oil trader Timchenko co-founded had ready access to supplies as the in-house trading arm of the nearby Kirishi refinery, part of the Surgutneftegaz oil company. But without access to the St Petersburg terminal, it was forced to export its oil by rail to neighbouring ports in Estonia or Finland, a much costlier route.[70]

Gaining control of exports through the St Petersburg terminal became so important that Timchenko turned to Putin for assistance. In January 1992, together with Pannikov’s Urals Trading, Timchenko set up a joint venture with Putin’s Foreign Relations Committee called ‘Golden Gates’.[71] They aimed to bypass the existing terminal, beset by rival gangs and under Kharchenko’s ultimate control, and raise Western financing to build a new, upgraded terminal.[72]

This was the first time the ties between Putin and Timchenko had emerged into the open. For almost a year, Putin led discussions with France’s BNP Paribas on a credit facility for the new oil terminal, backed by exports through Urals Trading.[73] But the talks fell apart when one of the key negotiators, a former KGB officer operating in Paris named Mikhail Gandorin, died just before the loan was to be approved.[74] ‘It looked like he’d been given something,’ one former Timchenko partner involved in the process said. ‘He called me two days before he died, and he couldn’t speak.’[75] That summer another member of the Golden Gates group, Sergei Shutov, was threatened and told to stay away from the project.

The project was under severe attack, with St Petersburg’s mafia groups, including the Tambov, battling each other to gain control of revenues from the existing terminal. The pressure mounted to such a degree that, according to two senior Western bankers, Putin sent his two young daughters away to Germany for their safety.[76] There is no indication Timchenko had any involvement in the violent struggles that accompanied Traber’s takeover of the port and oil terminal. But eventually, instead of building a new terminal, the way was opened for him to win a monopoly on exports through the existing terminal.[77]

One former Traber associate, a former Timchenko partner and a former KGB associate claimed Timchenko would only have been able to gain such a monopoly through forging some kind of working relationship with Traber. ‘Traber always had good relations with Timchenko,’ said one of Traber’s former associates. ‘The monopoly Timchenko won on exports would only have been possible through such ties.’[78] ‘If you need to ship oil and the port is full of bandits, then you need to agree,’ said a former senior KGB officer who worked with Putin in the nineties. ‘There was no way to go through without their agreement.’[79]

Lawyers for Timchenko said the relationship was no more than a ‘commercial, arm’s-length’ one, while any suggestion Timchenko had any involvement with organised crime, corruption or any other improper or illegal activity in St Petersburg, whether ‘via Mr Traber or in any other way’, was false and libellous. In 2011, a Timchenko representative told Russia’s Novaya Gazeta Timchenko was acquainted with the co-owner of Traber in the sea port and oil terminal, Dmitry Skigin, but the two men had not engaged in any joint business projects.[80]

At the same time, Timchenko was drawing on a network of KGB-linked foreign bankers to finance his trading operations. First, there was Dresdner Bank, headed in St Petersburg by one of Putin’s former Stasi comrades, Matthias Warnig, who’d worked with him in Dresden as part of a KGB cell.[81] Then there was Andrei Akimov, who’d worked with Yevgeny Primakov at the Institute of World Economy before becoming the youngest head of the Soviet foreign bank in Vienna, where, in the year before the Soviet fall, he set up his own private venture, IMAG, which provided financing to Timchenko.[82]

All the while, Putin assisted, issuing the licences allowing Timchenko to use the oil-storage facilities at Traber’s sea port, and helping facilitate supply arrangements between Timchenko’s Kirishineftekhimexport and Kumarin’s PTK.[83] Kumarin, meanwhile, joined the board of both outfits’ supplier, the Kirishi oil refinery.[84]

‘It was all very well organised,’ said Maxim Freidzon, co-owner of another oil trader in the city. ‘Putin and his guys ensured support from City Hall. Because of his KGB past, he could help with the logistical organisation. It was all one team.’[85]

The alliance that was forged then took KGB traditions from before the Soviet collapse and put them to a still more commercial use. ‘As far as I remember, the symbiosis between the bandits and the KGB had always existed,’ said Freidzon. ‘The KGB had worked with the bandits in the currency markets and in prostitution rings. They were sources of information. It was a natural symbiosis: neither of them had any moral limits. The bandits were like the infantry for them. They would take all the risks.’[86]

Putin’s interest in St Petersburg’s sea port and oil terminal often seemed more direct than that of a state official responsible for the city’s share. The alliance he built with Ilya Traber and his men troubled even visiting businessmen. When one was brought in to help arrange financing for the port, he was whisked from the city’s Pulkovo airport straight to Traber’s lair in an armoured car, accompanied by police and Traber’s guards. On arrival at the high-gated compound in a back street, he was escorted past armed guards and snarling German shepherds. After passing through several rooms adorned with icons, he arrived at an inner chamber where Traber was waiting, wearing a tracksuit bottom and slippers, a thick chain with a huge gold cross around his neck – the uniform of the city’s bandits. The businessman was left in no doubt about whom he was meeting. ‘It was like in the movies,’ he said. ‘My heart stopped when I saw him.’[87]

The scene was far from what he had expected when he was invited by an official from City Hall to assist with financing the port. But after a tense discussion with Traber, he received the nod of approval. The next day he was taken to more salubrious surroundings: the downtown law offices of one of Traber’s business partners, Boris Sharikov, on one of St Petersburg’s most picturesque canals. Also at the meeting was a former KGB officer who’d become another of Traber’s partners, as well as Putin and the City Hall property chief Mikhail Manevich, and a smooth-talking thirtysomething named Dmitry Skigin, who the businessman was to learn owned the port jointly with Traber. Skigin was the acceptable face of the port, a mild-mannered geek, fluent in the language of international finance, a disciplined businessman who went mountain climbing in his spare time and spoke English and French. His father Eduard was close to Putin, according to Monaco intelligence.[88] But according to two of Skigin’s former business partners, he was also a front for another St Petersburg crime boss, a pugnacious former boxer named Sergei Vasilyev, with whom Traber had agreed a fragile peace for joint control of the port, and later for its oil terminal.[89]

The alliance St Petersburg’s administration forged with the Tambov group became embedded deep in the city’s infrastructure. With the help of Putin’s men in City Hall, the sea port become a major hub for smuggling drugs from Colombia into Western Europe, former senior KGB officer Yury Shvets later testified to a London court. One of Putin’s closest allies in the St Petersburg security services, Viktor Ivanov, had assisted the Tambov group in taking over the sea port, while Putin provided protection from the mayor’s office, he said.[90] (Ivanov strenuously denied the claim, but other signs emerged that the St Petersburg port was a vital channel for drug trafficking.[91])

Control of the port became so strategic that when, in 1997, the Property Department chief Mikhail Manevich sought to return the voting rights City Hall had lost to its 29 per cent stake during its privatisation, he was shot dead by a sniper as he drove to work.[92]

‘Manevich was pushing for it all to be returned to the state,’ said a former Traber associate. ‘The leverage that he had was that he could refuse to extend the licence for the long-term rent of the port including the oil terminal. And for this he paid with his life.’[93] Vyacheslav Shevchenko, a former member of the St Petersburg parliament and a close Manevich ally, reportedly testified to the police murder inquiry that in the final days of his life Manevich had been deeply troubled by the situation at the port: ‘On his request, I went twice to the port and spoke with the head of the port. I made a proposal that the English insurance company Lloyds should come to analyse the port’s financial situation. A week later, two of Traber’s bandits visited me and told me if I went to the port again my head would be cut off with an axe.’[94]

Traber refused to comment for this book, saying the allegations were ‘fantasy and slander’.[95] Just three months after Manevich’s murder, the port’s shareholders agreed to extend a new long-term management contract for the port to a new Traber company, OBIP, owned by a Liechtenstein foundation called Nasdor Incorporated.[96] Later, the only person who ever dared to speak out publicly about the looting of the Baltic Sea Fleet was the city’s mayor at the time it occurred, Anatoly Sobchak. Long after he had stepped down he wrote a newspaper article in which, for the first and only time, he publicly criticised the actions of the city’s post-Soviet KGB. ‘The prosecutors, the FSB and the policemen who took part in this should be charged with abusing their position and for causing the country enormous loss.’ he wrote.[97] Four months later he was dead. ‘I fear this was what cost Sobchak his life,’ said an associate of Kharchenko.[98]

In the eyes of Putin’s KGB allies, the alliances they forged then were necessary as the only way to restore some degree of control in the chaos of the Soviet collapse. The organised-crime groups were the infantrymen they needed to help control the masses, the men on the street – as well as in the prisons, according to one of Putin’s associates then. This was a typical KGB practice, forged in the Soviet past, when Putin for instance had run illegals through East Germany. ‘They worked with people. This is what they did,’ said a former KGB officer who worked with them. ‘Imagine you need to calm down a bunch of alpha males. If you can’t shoot them, this is terribly difficult work.’[99] But the argument that they needed to do this if they were to bring order was only a self-justification behind the power grab. The oil-for-food scheme had also been set up ostensibly to save the city – whether to bring in food or to pay down debts. But all it had achieved was to create a network of black cash to preserve the power and the networks of the KGB.

In the skein of these relationships, another thread led to one of the structures set up for the Communist Party’s ‘invisible economy’ in the final days of its rule. This was Bank Rossiya, a small St Petersburg bank which was one more key intermediary in some of the oil-for-food barter deals. Like many of the institutions and firms set up by the Party in the dying days of the regime, when the August 1991 putsch failed and the Soviet Communist Party was banned, control of Bank Rossiya passed noiselessly into the hands of representatives of the KGB. Its new shareholders included a senior KGB officer and two KGB-connected physicists who specialised in rare-earth metals, materials so rare, and so strategic, that trade in them could only be handled by members of the KGB.

Spy

When the senior KGB officer Vladimir Yakunin returned to Leningrad in February 1991, a year after Putin, from a posting undercover at the United Nations in New York, he was shocked by the conditions that greeted him. He had come from a comfortable residence in New York to the grime of a working-class area of Leningrad, where the street lamps rarely shone and his wife would return home from the shops in tears because the only thing on the shelves was pickled cucumbers. ‘In essence, the country that had sent me to work abroad, and in which I grew up and where my children were born, had ceased to exist,’ he said. ‘So too had the values – the social and moral values – which were the fundamental basis for any society. The entire country had descended into a certain darkness.’

It seemed to him that everything he’d once believed in had collapsed: ‘We were brought up in the spirit of loyalty to the Party and to the people. We really did believe we were doing something useful for our country and for our people.’ But like many in the foreign-intelligence services, he’d long been able to see that the Party leadership was failing: ‘There was no one who knew how to deal with the growing problems … The gap between reality and ideological dogma led to deep distrust in the country’s leaders.’[100]

Although the loss of empire and the loss of the decades-long Cold War hit men like Yakunin hard, he was among those who moved fast to embrace Russia’s new capitalism. And while he said he hankered for the days of certainty, for the morality and values that he believed lay at the foundation of Communism, that did not stop him from leaping into business before the Soviet Union had even collapsed, to pocket vast amounts of cash both for himself and, more importantly, to help preserve the networks of the KGB.

For four years after the Soviet collapse, Yakunin remained an officer in the security services, never resigning his post. Although he insisted that he hadn’t been taking orders, he admitted that the aim of his and his partners’ business activities was partly to preserve what they could: ‘We needed to redirect ourselves. We needed to create commercial enterprises that would earn money … We were all part of this process. The traditions of communication and cooperation remained.’

Yakunin joined forces with associates from St Petersburg’s prestigious Ioffe Institute for Technology and Physics, where he’d worked overseeing the institute’s international connections before being sent to New York. Among them was Yury Kovalchuk, then thirty-nine and a leading physicist of his day. Kovalchuk had a high forehead and a hawk-like gaze, and he worked closely with Andrei Fursenko; both of them were deputies in the Ioffe Institute’s work on sensitive semiconductor technologies deployed in laser and satellite systems. This was an area at the heart of the KGB’s special interest, in which all manner of smuggling schemes had been deployed to bypass embargoes and steal technology from the West (Yakunin was believed to have worked on technology smuggling when he served undercover in New York). Their expertise landed Yakunin, Kovalchuk and Fursenko a lucrative assignment: a deal to sell a batch of rare-earth metals, including rare and strategic isotopes used in the aerospace and military industries, and in semiconductor technology.[101] They were given the deal by a senior general in the KGB, said Yakunin. Once they’d pulled it off, one of the joint ventures they’d created, Temp, landed 24 million roubles in profits.[102] It was a huge sum in those days, and it helped them take over Bank Rossiya.

The three men had set up a string of such joint ventures in the final months before the Soviet collapse, as the KGB stepped up preparations for the transition to a market economy, and they’d already been working closely with Bank Rossiya. In the aftermath of the failed August coup, said Yakunin, they had briefly feared that they might go out of business when their accounts in Bank Rossiya were frozen, along with the rest of the property of the Communist Party. But their connections, and the cash they made in the rare-earth metals deal, saved them. High-ups in the local Party and the KGB gave them the nod to take over Bank Rossiya and bring it back to life. ‘We were people who were well-known in the party structures of the city of Leningrad,’ said Yakunin. ‘We had many contacts, and people trusted us. We were allowed to take a controlling stake in Bank Rossiya precisely because these people trusted and respected us.’[103]

From the beginning, Bank Rossiya had been strategically connected to the foreign-relations committee run by Putin. Its offices were in the Smolny Institute, which had become the city’s mayor’s headquarters, and it began to play a key role in the creation of the obschak, the common cash pot for Putin’s men. The city’s KGB-connected businessmen, including Yakunin, Kovalchuk and Fursenko, almost religiously continued to follow the prescriptions of the KGB laid out in the twilight years of the Communist regime, when trade was to be ordered through joint ventures with foreign entities. All joint ventures were set up on the approval of Putin’s committee, and most were directed to open accounts with Bank Rossiya. In one instance, millions of dollars were siphoned from the city budget through Bank Rossiya’s accounts into a network of such companies linked to Putin’s men. The cash had been funnelled through a fund known as Twentieth Trust. At one point the scheme had threatened to embroil Putin in a criminal case. Like many of the slush funds created by Putin’s men, the money had gone towards strategic needs such as funding election campaigns, and also for personal acquisitions such as luxury properties in Finland and Spain for city officials.[104]

As Putin and his KGB men became more secure in their control of the city’s economy, they began to dream their own bourgeois dreams. One transfer in particular paid for a five-star hotel trip for Putin and the head of Twentieth Trust to Finland, where they met an architect from the St Petersburg government and most likely discussed plans for the building of a group of dachas, according to a senior police officer who investigated the case.[105] ‘Soviet people always have a dream to have a dacha,’ said a Putin associate from then.[106] ‘The understanding was that it was not just important to have a good piece of land, but also to have the right neighbours.’

The patch Putin chose to while away his weekends in peace and tranquillity was far down a highway snaking north from St Petersburg through the forests and lakes of Karelia. Near the border with Finland, an unsignposted road led to a snug group of wooden houses on the shores of the Komsomolskoye lake, renowned for its excellent fishing. Before Putin moved in, the road had been no more than a dirt track. But soon after the new inhabitants arrived it was asphalted over, and lights were installed.

The villagers who’d lived peacefully for generations on the coveted stretch of land on the lakeshore saw new, more powerful electrical lines installed, though none of the power reached their homes. Instead they were asked, one by one, to move away, and were either given money to leave or provided with new ready-built houses further inland. Their powerful new neighbours built imposing Finnish-style chalets on vast tracts of land. They formed a group that became known as the Ozero dacha cooperative, and took over the lakeshore, from which their former neighbours were cut off by a high new fence. When the newcomers had parties, the old inhabitants could only watch the festivities and fireworks from afar. They knew not to object. ‘My mother told me a simple thing: don’t fight the strong and don’t sue the rich,’ said one of them.[107] The only inhabitant who tried to fight lost every stage of her trial.

The men who moved to Lake Komsomolskoye with Putin were the blue blood of his KGB acquaintances. Mostly shareholders of Bank Rossiya, they included Yakunin, Fursenko and Kovalchuk. All of them had been connected to Putin since even before the St Petersburg days. ‘These were people who were close to Putin from before,’ said one former Putin associate.[108] ‘They hadn’t got there because of their work or their knowledge – but just because they were old friends.’

This was a principle that was later expanded across the entire country. After Putin became president, he and his allies from the Ozero dacha group began to capture strategic sectors of the economy, creating a tight-knit network of loyal lieutenants – trusted custodians – who took control of the country’s biggest cash flows and excluded everyone else. Bank Rossiya was to form the core of the financial empire behind this group, and it was to spread its tentacles throughout Russia, and deep into the West too.

Those who’d worked with Putin at the sea port and the oil terminal also followed him when he vaulted to power. Timchenko was prime among them, first in the shadows working, according to two former associates, as an unofficial adviser, and then becoming the nation’s biggest oil trader. The men who ran the St Petersburg sea port under Traber’s watch were to take the first senior positions in Gazprom, the state gas giant, as Putin began to take over the country’s biggest and most strategic assets. Then, when Putin made his first moves to take back the nation’s oil industry from Western-leaning oligarchs like Mikhail Khodorkovsky, Timchenko and Akimov were part of the core group who benefited.

But in those days in the nineties, when they were just starting out, it was difficult to imagine that they would ever make it so far. The members of the Ozero dacha cooperative kept themselves to themselves, rarely speaking to the former neighbours who they’d moved away from the shores of the lake. But after Putin moved to Moscow, the weekend visits became rare. The houses they’d built were left empty, like ghosts on the edge of the lake. ‘It became too small for them here. They had absolutely different opportunities in Moscow,’ said one of the neighbours.[109]

*

When Putin was suddenly appointed to a senior position in the Kremlin in Moscow in the summer of 1996, one of the senior KGB generals who’d watched closely over his St Petersburg career pronounced himself satisfied with him. ‘He began his career as an official from zero,’ the general, Gennady Belik, later told a reporter. ‘Of course he made mistakes. The issues for him were absolutely new … The only people who don’t make mistakes are the ones that don’t do anything. But by the end of his activities in St Petersburg, Vladimir Vladimirovich had grown a great deal.’[110]

Belik was a veteran of the KGB’s foreign-intelligence service, and in St Petersburg he’d overseen a network of firms trading in rare-earth metals. He’d been a mentor of sorts to Putin as he managed the city’s economy, while according to one close ally Putin also stayed in touch with former KGB chairman Vladimir Kryuchkov.[111] But although Putin’s men had dominated much of the city’s economy, the amounts of cash they were dealing with in St Petersburg were minuscule compared to what the young Western-leaning tycoons like Khodorkovsky were taking over in Moscow. They were far away from the action as the new oligarchs of the Yeltsin era began to carve up the country’s industrial wealth. For many of the St Petersburg KGB men, what was going on in Moscow represented the collapse of the Russian state. Vladimir Yakunin, for one, saw the country as being seized by a cabal of corrupt members of the Party elite and by men like Khodorkovsky who he called ‘criminals’.[112] The KGB men saw Yeltsin as a drunken buffoon, a mid-ranking Communist Party official who danced to the tune of the West and who was now handing over the country’s strategic enterprises for a song to a corrupt gang of rapacious businessmen. ‘People had given their lives. They’d served honestly and put their lives at risk. But all they got was a finger up their ass from a drunk bastard who by the way was no better than a local Communist Party leader,’ said a former KGB officer who worked with Putin in St Petersburg.[113]

Though it seemed far from likely then, Putin’s move to Moscow was the first step towards changing that equation. His promotion had happened at a moment when he should in fact have been down and out. In the summer of 1996, Anatoly Sobchak had just lost his campaign for re-election as St Petersburg’s mayor. Putin, as his campaign manager, had been partly responsible. Sobchak lost by a whisker: by 1.2 per cent – the equivalent, his widow Lyudmilla Narusova later said, of the occupants of one large apartment building. Whispers circulated that Sobchak’s defeat had been organised by Yeltsin, who wanted him out, as the flamboyant and charismatic Sobchak could have posed a challenge to Yeltsin’s own battle for re-election as president a few months later. Narusova was convinced of that: ‘He’d become too independent. Yeltsin saw him as his competitor, and therefore the order was given that the elections were to be a farce.’[114] Before the campaign had even begun, Sobchak was targeted by a criminal investigation over bribery allegations. Many believed it was part of a dirty tricks campaign by the old-guard security men surrounding Yeltsin.[115]

The allegations undoubtedly impacted the outcome of the election, and Putin resigned from the St Petersburg administration immediately after the loss. Kremlin spin doctors telling the official story of Putin’s career have always stressed his loyalty to Sobchak in stepping down, and the risk he took in facing unemployment because of his principles. But in fact he was out of work for less than a month before he was invited to Moscow, initially to take up a prestigious position as a deputy head of the Kremlin administration. He had been helped along the way by Alexei Bolshakov, a dinosaur from the Leningrad defence establishment and most likely from the KGB, who’d somehow become Yeltsin’s deputy prime minister.

Although Putin’s appointment was unexpectedly blocked by Anatoly Chubais, the Western-leaning privatisation tsar who’d become Yeltsin’s new chief of staff, he was not abandoned. Instead, he was asked to head the Kremlin’s fabled foreign property department, which had inherited all the Soviet Union’s vast overseas holdings after the collapse – the stately trade and diplomatic missions, the network of arms bases and other military installations, clandestine or otherwise. Though it was an empire in which much had already gone unaccounted for, it represented a strategic core of the nation’s imperial wealth, and for Putin this was a prestigious promotion indeed.

It was the beginning of a dizzying rise. Within seven months of his move to Moscow, Putin was promoted further still. First, he was made head of the Control Department, a core institute of Kremlin power, where he was charged with making sure the president’s orders were carried out across the nation’s unruly regions. ‘They didn’t just take Putin from the street,’ said one close ally. ‘He was known in Moscow as an adviser to Sobchak, as an influential person in St Petersburg … I think this transfer was planned.’[116] Then, a year later, he was promoted to become the Kremlin’s first deputy chief of staff in charge of the regions, the third most powerful role in the Kremlin after the president. After just three months in that role he was appointed to head the FSB, the successor agency to the KGB, for the whole of Russia. He was only a lieutenant colonel at the time, and it was unheard of for anyone other than a general to head the FSB. The FSB generals were said to be aghast, but Putin’s allies insisted that his status as first deputy chief of staff gave him a rank equivalent to a general. It was just that it was in civilian terms, they said.[117]

Yeltsin’s son-in-law Valentin Yumashev, a good-natured former journalist who’d risen to become Yeltsin’s chief of staff, insisted that Putin’s miraculous rise was down to his outstanding qualities. ‘Among my deputies, he was one of the strongest,’ he told me. ‘He always worked brilliantly. He formulated his views exactly. He would analyse the situation exactly. I was always happy I had such a deputy.’[118] But for others who had known him in St Petersburg, Putin’s elevation was taking on a surreal quality. Some of his former associates questioned whether he was being propelled by the KGB generals who’d mentored his career from the beginning. ‘You could make the case that he’d first been given the task to infiltrate the democratic community through his work with Sobchak,’ said one. When Sobchak had become surplus to requirements, had Putin played a role in helping make sure he lost? ‘It’s totally possible that Putin was following the orders of the Kremlin, and that when he completed this task he entered the Kremlin and became so important,’ said the former associate. ‘If you suppose this was a special operation to liquidate Sobchak as a contender, then everything becomes clear.’[119] But others argued that Sobchak had become increasingly controversial in St Petersburg in any case, mainly due to what many saw as his arrogance. It hadn’t taken much to make his bid for re-election touch and go.

However he got there, once Putin assumed his role as director of the FSB, he soon began to clean up the stains from his St Petersburg past. One of his greatest enemies from those days was Yury Shutov, a former Sobchak deputy who’d clashed with Putin and had been collecting compromising material on him – on the oil-for-food deals, on the privatisations of the city’s assets and on his ties to the Tambov group. Soon after Putin’s appointment, Shutov was arrested at gunpoint. He’d long been a deeply controversial figure and rumours of his ties to the St Petersburg underworld ran deep. But once Putin became FSB chief, the suspicions turned into legal charges. He was charged with ordering four contract killings and attempting two others. Though he was briefly freed by a local court which ruled that there was no legal basis for a criminal case, Shutov was swiftly arrested again, and dispatched to Russia’s toughest penal colony, known as the Beliy Lebed, or White Swan, in Perm, in the depths of Siberia. He never emerged from it. The material he’d gathered on Putin’s ties to Tambov simply disappeared, said Andrei Korchagin, a former city official who had known Shutov well: ‘He was Russia’s first and only real political prisoner.’[120]

An even more disturbing omen came just four months after Putin’s appointment as FSB chief. Galina Starovoitova, the same stout and tweedy human rights activist with soft brown hair who Putin had approached for work after his return from Dresden to Leningrad, was shot dead at the entrance to her apartment building late one evening in November 1998. She was by then St Petersburg’s leading democrat, its most vocal crusader against corruption. The whole city was in mourning after her death, the nation in shock. Many commentators linked her killing to tension surrounding elections to the local parliament that were to be held the following month. But one of Starovoitova’s former aides, Ruslan Linkov, who was with her at the time of the shooting but somehow escaped with his life, believed she was killed because of her corruption investigations.[121] One of her closest friends, Valeria Novodvorskaya, another leading democrat, was convinced the St Petersburg security men had ordered her murder: ‘They were clearly behind the scenes. They held the hand of the killers.’[122] A former partner of Ilya Traber said the biggest threat to Starovoitova could have come from the St Petersburg siloviki who controlled the sea port, the fleet and the oil terminal: ‘She had a dossier on the group of people who controlled the oil business in St Petersburg. Traber told me about this. He said, “Why the hell did she start looking into the oil business?” This is why she was killed.’[123] Later, a former FSB officer who’d investigated her death told me he suspected it was indeed Tambov that organised it: ‘We understood that we would not be able to get anywhere with the case.’[124]

The events that accompanied Putin’s rise were ominous. But the country was hurtling towards another financial crisis, and the warning signs, it appeared, were not noticed by anyone. Yeltsin’s health was failing, and if at least one account is to be believed, the generals of the KGB were preparing to return. One evening in Moscow, soon after a financial crash that obliterated the Russian economy in August 1998, a small group of KGB officers and one American gathered for a private dinner. Among them were the former KGB chief Vladimir Kryuchkov; Robert Eringer, a former security chief for Monaco who’d dabbled as an informant for the FBI; and Igor Prelin, an aide to Kryuchkov and one of Putin’s senior lecturers at the Red Banner spy institute. According to Eringer, Prelin told the other guests that soon the KGB would return to power: ‘He said, “We know someone. You’ve never heard of him. We’re not going to tell you who it is, but he’s one of us, and when he’s president we’re back.”’[125]

4
Operation Successor: ‘It Was Already After Midnight’

*

‘Everyone forgot. Everyone thought that democracy would just be there. Everyone was thinking only about their own personal interests.’

Andrei Vavilov, former first deputy finance minister in Yeltsin government[1]

*

Plan A

MOSCOW – It was summer 1999, and a deathly quiet had descended on the Kremlin. In the warren-like corridors of the main administration building, the only sound was the steady whirr of electric motors as cleaners polished the parquet floors. In the distance, the clopping heels of a lone presidential guard on patrol echoed down the halls. Offices once overflowing with petitioners queuing for favours now stood largely empty, their former occupants huddled far from Moscow in their dachas, nervously drinking tea. ‘It was like being in a cemetery,’ said Sergei Pugachev, the Kremlin banker who’d also happened to serve as an adviser to a succession of Kremlin chiefs of staff. ‘It was like a company that had gone bankrupt. All of a sudden there was nothing there.’[2]

For Pugachev and the other members of Yeltsin’s inner circle, widely known as the ‘Family’, who were the Kremlin’s few remaining occupants, a tense new reality had begun. Yeltsin had been in and out of hospital ever since October, and outside the walls of the Kremlin, it seemed, a coup was being prepared. Piece by piece, the foundations of Yeltsin’s rule were being dismantled, a consequence of the past summer’s disastrous rouble devaluation and default on $40 billion in government debt. The easy money, the free-for-all for the well-connected few that had defined the boom years of the market transformation had ended in a spectacular bust. The government had spent four years funding the country’s budget through issuing short-term debt, creating a pyramid scheme in which the only winners had been a handful of oligarchs, the young wolves of the Yeltsin era. For a time, the tycoons had used surging interest rates on government bonds and a fixed exchange rate to pocket the proceeds of a surefire bet, while the central bank burned through its hard-currency reserves keeping the rouble stable. It had all come crashing down in August 1998, and once again the Russian population had borne the brunt of the blow. Many of the oligarchs’ banks had collapsed in the crisis, but while they themselves had managed to funnel most of their fortunes away offshore, the general population’s savings were wiped out. The parliament, then still dominated by the Communists, was in uproar. Forced onto the defensive, Yeltsin had been backed into appointing a prime minister from the top echelons of the KGB, Yevgeny Primakov, the former spymaster who’d run the foreign-intelligence service and had long been a sentinel of the networks of the KGB. Racked by ill health, his regime in tatters, Yeltsin had retreated to the Black Sea resort of Sochi, while Primakov brought a string of Communist deputies, led by the former head of the Soviet economic planning agency Gosplan, into his government. Yeltsin was repeatedly hospitalised, and a Kremlin aide gently hinted that he was to take a back seat from then on.[3]

One by one, members of the Communist old guard had been settling on perches at the top of the government, and now that they were taking control of the cabinet, financial scandal after financial scandal targeting the excesses of their opponents in the Yeltsin ruling elite was beginning to emerge. Leading the corruption charges was Yury Skuratov, Russia’s rotund and seemingly mild-mannered prosecutor general. Until early that year, he had attracted more attention for his ability to quietly close down criminal cases than for opening them. Now, however, amid the widespread outrage that accompanied the country’s financial collapse, he’d begun to target top-level corruption. First, he’d launched a broadside against the central bank. In a letter to the Communist speaker of the State Duma, he zeroed in on how the bank had secretly funnelled $50 billion of the country’s hard-currency reserves through Fimaco, the obscure offshore company registered in Jersey[4] – a revelation that opened a Pandora’s box of insider trading and siphoned funds through the government debt market.

Behind the scenes, several more threatening probes were under way. One was a case that could lead directly to the financial accounts of the Yeltsin Family. It focused on Mabetex, a little-known company based in the Alpine Swiss town of Lugano, near the Italian border, which throughout the nineties had won billions of dollars in contracts to renovate the Kremlin, the Russian White House and other prestigious projects. Initially the probe, launched by Skuratov in tandem with Swiss prosecutors, appeared to focus on kickbacks apparently paid to middlemen close to Pavel Borodin, the jovial and earthy Siberian party boss who’d ruled over the Kremlin’s vast property department since 1993. But behind that lay a potentially bigger affair. And those in the Kremlin who were ruling in Yeltsin’s stead knew this only too well. ‘Everyone was scared about what was going to happen,’ said Pugachev. ‘No one dared to come to work. Everyone was shaking like rabbits.’[5]

The groundwork for the case had been laid quietly. Part of the old guard, particularly those waiting in the shadows in the security services, had been looking for ways to oust Yeltsin since the beginning of his rule. They had long viewed his overtures to democracy with disgust, and when he appealed to Russia’s regions to take as much freedom as they could swallow, they saw it as part of a Western plot to weaken, and ultimately destroy, the Russian Federation. Still set in the zero-sum thinking of the Cold War, they regarded Yeltsin as being in thrall to the US government, which they liked to believe had helped to install him and destroy the Soviet Union in the first place. They despised his apparent friendship with US president Bill Clinton, and believed the market reforms they themselves had developed, and which had helped bring Yeltsin to power, had been perverted to create the oligarchic rule of the semi bankirschina – the seven bankers who’d outrun their former KGB masters to take over much of the economy. They cared nothing for Yeltsin’s democratic achievements: in their view he was an addled alcoholic incapable of leading the country, while the Yeltsin Family, which included his daughter Tatyana, his chief of staff (and future son-in-law) Valentin Yumashev and various acolytes of the oligarch Boris Berezovsky, was an unholy alliance that had illegally taken power behind the scenes, and was leading the country towards certain collapse.

‘A certain group of people understood that things could not continue this way,’ said one of the participants in this plot, Felipe Turover, the former KGB operative who’d worked with Putin on the St Petersburg oil-for-food scheme. ‘The whole operation was started out of necessity. There was no other choice. It had to be done. Yeltsin was a drunk and a heavy drug addict. It is a matter of fact that the country was ruled by his daughter, by a bunch of idiots who were only looking after their own interests … The governors were disobeying the Kremlin. The regions were starting to almost become independent countries. We needed to get rid of that scum.’

Turover refused to disclose the names of the security officials in the group plotting to remove Yeltsin from power. But it was clear that they were angling to replace him with Primakov, who as a former spymaster was one of their number. From the start, the group was looking for evidence directly linking Yeltsin to financial corruption; for something that would taint the president irredeemably, overcoming the widespread and age-old Russian view that the country’s problems were due to the poor decisions and corruption of the courtiers, the boyars surrounding the tsar, and not the president himself. ‘Because he’d been praised as the great democrat, no one knew how to get rid of him,’ said Turover. ‘The only clear path was a legal path. It had to be clear to the people that it wasn’t the case that the tsar was good and without fault, while the boyars were the bad guys. When the president is a thief himself, then everything is clear. We needed to have something concrete.’[6]

Turover was the informant who found and then disclosed the material that formed the basis of the case. From his perch overseeing clandestine payments of Soviet-era strategic debt, he had been gathering and sifting kompromat – compromising material – on the inner financing of the Yeltsin regime for years, in the hope that the right moment would come. As a close friend of the former head of the KGB’s black-ops department for financing illicit operations abroad, he’d been a member of the KGB security establishment since the eighties. Turover was the same wisecracking, tough-talking foreign-intelligence officer who had helped Vladimir Putin set up the oil-for-food scheme in St Petersburg in the early nineties – the scheme that created a strategic slush fund for Putin and his allies from the KGB. He’d helped set up other clandestine schemes that he said were to ensure the payment of the strategic debts of the Soviet Union to the so-called ‘friendly firms’, but which were almost certainly also slush funds for the KGB.

Documents show that many of these schemes had run through Banco del Gottardo, a small bank hidden away on the outskirts of Lugano, at which Turover was appointed as an adviser.[7] Banco del Gottardo was chosen, Turover said, because ‘We needed a very small bank with a very dirty reputation.’[8] It had been the overseas arm of Banco Ambrosiano, the Vatican-linked bank that had collapsed in scandal in the eighties, with its chairman Roberto Calvi found dead, hanging from London’s Blackfriars Bridge. Now numerous Russian black-cash financing schemes were run through its accounts, including a web of barter and commodities-export schemes through which billions of dollars had been siphoned.

It was another sign that for all Yeltsin’s attempts at market reform, for all his efforts to build a new Russia out of the rubble of the Soviet collapse, the old ways of the komitetchiki, the KGB men, still prevailed behind the scenes. Although Yeltsin had tried to man the ranks of his government with so-called ‘young reformers’ who sought to liberalise the Russian economy from the control of the state and run the country along the transparent lines dictated by the institutions of the West, the rules of business were still skewed in favour of insiders close to the state, and to the foreign-intelligence community. It was through these schemes that the Yeltsin Family had been compromised, and it was all the more telling that the blow to the freedoms Yeltsin had sought to bring to Russia came from a member of the KGB foreign-intelligence establishment. Yeltsin had been unable to pull either his country or his own family out of the practices of the past.

Banco del Gottardo hosted the accounts of Mabetex, the obscure Swiss company which handled the Kremlin renovation contracts, and this was where the links to Yeltsin and his family appeared. When he’d first uncovered these ties, Turover said he’d initially objected to handling any cash flow related to Yeltsin or his family. ‘But then I stopped, because I decided that all this could come in handy for the future.’[9]

Among the Banco del Gottardo accounts he oversaw, Turover had discovered credit cards for Yeltsin and his family. They’d been issued by the founder of Mabetex, a pugnacious Kosovar Albanian named Behdjet Pacolli, who’d worked in the netherworld of financing and construction for the Soviet regime since the seventies.[10] Pacolli, once an aide to the Yugoslav Communist Party boss, had long been involved in black-cash financing schemes through the sale to the Soviet regime of embargoed dual-use military goods, said Turover.[11] On the face of it, the credit cards looked like an out and out bribe by Pacolli, paid directly into the pockets of Yeltsin and his family, while the fact that they were paid out of a foreign bank account was a direct breach of a law banning Russian officials from holding such accounts. Yeltsin’s daughter Tatyana had spent the most, running up bills worth $200,000 to $300,000 every year.[12] A further $1 million had apparently been spent by Yeltsin during an official visit to Budapest.[13]

By the standards of today’s multi-billion-dollar corruption scandals, the sums are almost laughable. But in those days the equation was absolutely different. The balance of power had already fast been shifting away from the Kremlin to Primakov’s White House. The old guard and the Communists were on the rise. In the aftermath of the financial crash, Yeltsin’s popularity ratings were at an all-time low of 4 per cent. The Communist Party, which still dominated the Duma, scheduled impeachment hearings to put Yeltsin on trial for everything they deemed as sins of his rollercoaster rule: the disastrous war in Chechnya that had taken the lives of so many Russian soldiers, the dissolution of the Soviet Union, and what they claimed was the ‘genocide’ of the Russian population – the market reforms that had led to plummeting living standards and, they believed, to early deaths for millions of Russians. Revelations about the credit cards were intended to be the final straw. ‘Primakov was meant to stand up in the Federation Council and tell the senators the president was a thief,’ said Turover.[14]

The investigation also threatened to draw uncomfortably close to the much bigger sums that had washed through an oil exporter called International Economic Cooperation, or MES, that held accounts in Banco del Gottardo and was inextricably linked with the Kremlin reconstruction contract. MES had been granted contracts from the Russian government to sell more than 8 per cent of the country’s total oil and oil-product exports, its annual turnover nearing $2 billion in 1995.[15] It had been active since 1993, when old-guard members of the Yeltsin government had sought to take back control of the oil trade, reinstating a system of special exporters, known as spetsexportery, through which all oil companies had to sell their oil.[16] It was an insider game that lined the pockets of a small and murky group of traders mostly close to the security services in the Yeltsin administration. MES had initially been created as a means of financing the restoration of the Russian Orthodox Church after decades of destruction and oppression under Soviet rule. But the billions of dollars in crude it was granted by the Russian government, export tariff-free, far surpassed any amount ever spent on the restoration of the Church.

MES was like a souped-up version of the slush funds created through Putin’s oil-for-food scheme. None of its operations were transparent, and the lines between what was strategic and what could be spent on personal needs and bribes had become conveniently blurred. Mostly, it generated black cash used to make sure politics went the way of a faction of security men in the Kremlin supporting Yeltsin. ‘The authorities always needed money. It would seem there is the state budget. But if you need finances to ensure a vote in parliament goes a certain way, you’re not going to get the cash from the state budget,’ Skuratov later told me.[17] MES’s activities were closely tied to Mabetex and the Kremlin reconstruction project. When Pavel Borodin, the Kremlin property department chief, initially asked the government for funding for the Kremlin reconstruction project, he was told the budget had no cash.[18] So he asked for oil contracts to be sold through MES to finance it instead. But the decrees issuing the oil quotas for MES – first for two million tonnes, and then for another 4.5 million tonnes – were all classified.[19] No accounting of how the proceeds were spent was ever published. And then, as if the oil sales through MES had never been granted, the government made an official announcement that it was going to finance the Kremlin reconstruction by raising $312 million in international loans.[20] MES looked to have got away with as much as $1.3 billion in proceeds from the oil sales, and no one could explain where the money had gone.[21]

In the middle of it all was Sergei Pugachev, the Kremlin banker who would later flee to London and then Paris. A tall, gregarious expert in the art of backroom deals, he’d teamed up with Borodin while the bank he co-founded, Mezhprombank, was the main creditor of the Kremlin property department.[22] In those days the property department was a sprawling fiefdom, controlling billions of dollars’ worth of property retained by the state following the Soviet collapse.[23] With Pugachev’s help it doled out apartments and dachas, medical services and even holidays to members of the Yeltsin government. It was a Soviet-style patronage network that to all appearances extended to the Yeltsin Family too: Pugachev said he’d bought an apartment through Mezhprombank for Yeltsin’s daughter Tatyana.[24]

Officials’ wages were still paltry compared to what could be earned in business in the boom of Russia’s market transition, and Pugachev insisted that what the property department did was the only way to keep state officials honest, and stop them from taking bribes. But essentially the department was the ultimate Kremlin slush fund, and it gave Borodin a position of great power, including the ability to make or break careers. ‘People were queueing to see him,’ said Pugachev. ‘If you were a minister, you didn’t get anything if Borodin didn’t give you it. If you needed an apartment, a car, any resources you had to go to Borodin to get it all. It was a very influential position.’[25]

Pugachev would not explain the extent of his involvement with MES. But his Mezhprombank had helped bankroll the operation,[26] and he’d developed a deep friendship with the head of the Russian Orthodox Church, Patriarch Alexei II, working closely with him ever since his appointment.[27] Pugachev had nursed the Kremlin reconstruction project, and guided its every step. He was an adept of the Byzantine financing schemes of Yeltsin’s Kremlin, and reaped a fortune for himself along the way. He’d somehow managed to set up a financial arm of Mezhprombank in San Francisco in the early nineties,[28] and spent large parts of the year in the United States. His direct access to the Western financial system further ingratiated him with the senior officials of Yeltsin’s government. ‘I could explain to them how the Western financial system worked,’ he said. He rented the most expensive house in San Francisco, and later bought a fresco-covered villa in the south of France, high on the hills overlooking the Bay of Nice. He’d become close to the Yeltsin Family, in particular to Yeltsin’s daughter Tatyana, when he’d worked as part of a team helping to secure Yeltsin’s re-election in 1996, bringing in a team of American spin doctors who ran a US-style campaign that helped boost Yeltsin’s flagging ratings and focused on the threat of a Communist return.[29]

All the while, Pugachev worked closely with Behdjet Pacolli, the owner of Mabetex. He personally oversaw the entire Kremlin reconstruction project, from the signing of the contract to the renovations themselves, he said. From the beginning, it was a lavish operation. Though he insisted that he tried to make sure the Kremlin got the best price possible, it seems that no expense was spared. Wood from twenty-three different types of tree was used to recreate the ornate patterns of the Kremlin Palace floor. More than fifty kilograms of pure gold was purchased to decorate the halls, and 662 square metres of the finest silk to cover the walls.[30] The Kremlin was to be transformed to its tsarist-era glory after decades of Communist rule in which all the treasures of pre-Revolutionary times – the mosaic floors, the precious ornamentation, the golden mirrors and chandeliers – had been ripped out and replaced with the plainest of decorations. Two thousand five hundred workers toiled day and night to create a palace fit for Russia’s new tsar.[31] Every last detail had to pass under Pugachev’s gaze. When Yeltsin asked why an urn had been placed outside his office, snapping ‘We don’t smoke here,’ Pugachev had it swiftly removed. And when Yeltsin asked why the new floors creaked and squeaked, he gently explained that there were now caverns of cables beneath them to carry the Kremlin’s top-secret communications.[32]

When it was all completed, visiting foreign leaders were awed by the grandeur they saw. US president Bill Clinton and German chancellor Helmut Kohl could not help but gasp when they were shown the vaulted gold-leafed ceilings of the Ekaterinsky Hall, dripping with golden chandeliers. ‘And these people are asking for money from us?’ Kohl remarked.[33]

The reconstruction had cost around $700 million,[34] at a time when Russia was receiving billions of dollars in foreign aid, supposedly to help it survive. But the financing that had been disbursed by the state for it was many times higher. The oil quotas MES had received alone were worth as much as $1.5 billion, while Yeltsin had signed off on an official decree for $300 million in foreign loans. Pugachev had also leaned on the first deputy finance minister, Andrei Vavilov, to approve an additional $492 million in guarantees for a treasury bill programme for the Kremlin property department – apparently another scheme to fund the reconstruction programme.[35] None of it was accounted for.

Pugachev had been aware of the credit cards for the Yeltsin Family soon after Pacolli issued them. ‘I said to him, “Why did you do it?” He thought if he gave them the cards he would have them on a leash. He understood it was criminal, that this would mean the president was essentially taking bribes.’[36] He said he was also aware of bigger sums that had apparently gone to the Yeltsin Family. Later it emerged that $2.7 million had been transferred to two accounts in the Bank of New York in the Cayman Islands held in the name of Yeltsin’s daughter Tatyana’s then husband, Leonid Dyachenko.[37] A lawyer for the oil firm Dyachenko ran later said the funds were for work he’d done.

So when, on a cold grey morning in late January 1999, Swiss prosecutors sent in helicopters and several dozen armed vans to raid Pacolli’s Mabetex offices in Lugano and left with a truckload of documents, it was, to put it mildly, a bit of a shock.[38] Pugachev and Borodin were immediately informed by Pacolli, and the news travelled like a poisoned dart to Yeltsin’s daughter Tatyana, who in her father’s absence was acting as unofficial head of state, and to the man who was later to become her husband, Valentin Yumashev, or ‘Valya’, as he was affectionately known, who until recently had been the Kremlin chief of staff.[39] For Pugachev it was a threat because of all the sums that had washed through MES. For Tatyana and Yumashev, it could potentially lead to the credit cards and other, larger, sums that appeared to have been transferred to private offshore accounts.

Plan B

Yevgeny Primakov had always been a man of consensus, a consummate diplomat who did not like to rock the boat. Already in his seventieth year, he stepped for a while into the shadows, appearing to concede a temporary defeat. Yeltsin’s Kremlin, it seemed, had won breathing space.

But if Primakov had been the KGB’s Plan A to take back power, another opportunity was lying in wait. Whether by coincidence or by design, a combination of legal threats, fears, rivalries and pure political calculation came together, and led to the takeover of Russia by a far more ruthless generation of KGB men. The Family had been stuck in the mindset that Primakov could only be replaced by someone from the security services. ‘After Primakov, it was not possible to appoint a liberal,’ said Yumashev. ‘It had to be someone that the Duma – and society – would see as a strong figure, like Stepashin, who was a general.’

But Sergei Stepashin was probably the most liberal of all the leaders of the Russian security services – he’d even joined the progressive Yabloko Duma political party. Despite a background serving in the interior ministry in Soviet times, he was a historian by training, and had long been close to Yeltsin. They’d been working together ever since Yeltsin entrusted him to lead a federal investigation into the KGB’s role in the failed August coup. Yet for Yumashev and Pugachev, Stepashin had never been more than an interim candidate. Stepashin, Pugachev said, was vyaly – the Russian word for weak. He did not believe Stepashin was decisive enough to take the actions necessary to protect them: ‘It seemed to me he was someone who would make compromises with the Communists.’[86] Yumashev said that he too began to entertain doubts about Stepashin. They were jealous of Stepashin’s close relationship with Anatoly Chubais, the former Kremlin chief of staff and privatisation tsar who’d long been their rival for Yeltsin’s affections. Until late June, part of the Yeltsin Family had been toying with the idea of another candidate, Nikolai Aksyonenko, the railways minister, who they believed would more strongly defend their interests. But Yeltsin soon took a strong dislike to him.[87]

In the background, said Pugachev, he’d long been advancing his own candidate, the man he believed to be the safest, most loyal pair of hands. He was backing Vladimir Putin, who he’d first seen as a potential successor when he handled the tape of Skuratov with the prostitutes so coolly. They’d first met briefly in St Petersburg in the early nineties, and had got to know each other better when Putin was appointed as Borodin’s deputy in the Kremlin property department. There, they’d worked together every day, said Pugachev. Pugachev’s Mezhprombank was involved in raising funds for the foreign property department Putin headed (though Pugachev declined to specify exactly what the bank did).[88] From his office in a small room of the former Central Committee’s headquarters on Old Square, Putin was tasked with rooting through the vast foreign holdings Russia had inherited on the Soviet Union’s collapse. There were the palatial buildings of the special trade representative offices through which the lifeblood of the USSR’s export-based economy had run. There were the embassies and the strategic military bases, the arms depots and the secret safe houses of the KGB. Many of these holdings had been looted in the chaos of the collapse by the KGB and organised crime. They were meant to be on the balance sheet of the ministry of foreign affairs, but no accounting had ever been done. Putin’s job was to bring these properties back onto the books, but it’s not clear if he ever succeeded in doing so. The foreign property department was at the heart of the strategic interests of the KGB, and while Pugachev claimed that Putin had no inkling of the slush-fund machinations through Mabetex, or MES, the oil trader granted billions of dollars in export deals, it’s far from clear whether that could have been the case.

They’d stayed close as Putin continued his dizzying rise through the Kremlin, first as head of the Control Department, and then when he was anointed head of the FSB in July 1998. All the while, said Pugachev, Putin had been his protégé. His charm lay in the fact that he knew him as someone he could give orders to: ‘He was as obedient as a dog.’[89]

Initially, Yumashev claimed, he’d ‘had no idea about Putin’ as a candidate, and had pushed Aksyonenko instead.[90] But he had always been aware of Putin’s abilities. As Kremlin chief of staff, he’d overseen and approved each of the key moments of Putin’s rise, and they’d forged a close relationship. By March 1997 Putin was a deputy head of the Kremlin administration. Yet he’d always appeared modest, said Yumashev, and, unlike most other officials, uninterested in furthering his career: ‘Among my deputies, he was one of the strongest. He always worked brilliantly. But at one point he came to me and said he wanted to step down. I asked him not to go. He told me, “I have sorted out this work. I would like to find something new.”’[91] Soon after, in May 1998, Yumashev promoted Putin to the third most powerful post in the Kremlin: first deputy chief of staff in charge of the regions, a role that brought him into more frequent contact with Yeltsin. And then, just two months later, Yumashev moved Putin sideways to head the FSB.

This was the first sign of Yumashev’s – and the Family’s – absolute trust in Putin. In those days, just a month before the August 1998 financial crisis, clouds were already fast gathering over the Yeltsin administration. The country was besieged by a series of miners’ strikes over unpaid wages, which were beginning to spread into the nuclear sector too. The miners were blockading the Trans-Siberian Railway, a vital artery of the Russian economy. Putin’s predecessor as FSB chief had been seen as close to the Communists, and that summer, as the strikes began to spread and the threat of economic crisis loomed, while parliament was already beginning to speak of impeachment, it was of paramount importance for Yeltsin’s Kremlin to have its own man in charge of the security services.[92] The fact that Putin was only a lieutenant colonel rather than a general was whitewashed, and he was dubbed the first civilian head of the FSB instead. In that summer of crisis and murk, they got away with it.

Yumashev insisted that he’d always been convinced of Putin’s democratic credentials. What struck him most, he said, was his dogged loyalty to his former mentor and boss, Anatoly Sobchak, the former St Petersburg mayor. One incident in November 1997 stood out for him above all others: ‘The reason why I so strongly recommended him [as head of the FSB] was because there was an episode when he worked as head of the Control Department and he came and said, “Sobchak is going to be arrested, and I have to save him.” He said, “I have to take him out of the country because the siloviki – the prosecutors, the interior ministry and the FSB – should arrest him in the next two or three days.” It was absolutely clear to him and to me that there was a 50:50 chance he would be caught. I told him Vladimir Vladimirovich, “You understand that if you are caught you will lose your position, and it’s possible you will never find work again. You are going against the law.”’[93]

Putin, however, held his ground. He insisted the case against Sobchak was fabricated, just part of the smear campaign launched by the old-guard security men in 1996 ahead of Sobchak’s bid for re-election in St Petersburg because they hated him ideologically. Then Sobchak had been targeted by a criminal investigation over bribery allegations.[94] But what neither Putin – nor Yumashev when he recounted the tale – spoke of was the risk that the arrest of Sobchak could lead to Putin himself. There was no telling where it might lead if a rival faction had it in for him.[95]

Putin had arranged for Sobchak to be spirited away out of hospital on a national holiday, when no one was watching. He’d whisked him off on a private jet, which one insider said belonged to his close ally Gennady Timchenko, the alleged former KGB operative who’d won a monopoly on exports through the St Petersburg oil terminal. When Putin arrived back in the Kremlin after a brief absence, Yumashev was deeply relieved: ‘For two or three days I was between worry and horror, because it would have been such a grandiose scandal if the FSB or the MVD [the interior ministry] had caught Putin and Sobchak when they were crossing the [Russian] border. For me it was important that a person was ready to sacrifice his career for justice, and when he returned I told Boris Nikolaevich [Yeltsin] of this.’[96]

Yumashev claimed that another event had also imprinted itself on his perception of Putin. In late 1998, during Primakov’s tenure as prime minister, Putin had called Yumashev from his car and told him he’d just been with Primakov, and wanted to meet urgently. ‘When he arrived, he told me, “There is a very strange situation.” He said, “Primakov called me and asked me as head of the FSB to begin wiretapping Yavlinsky.”’ Grigory Yavlinsky was a leader of the liberal opposition in the Duma who had spoken out about corruption in Primakov’s cabinet. Primakov had apparently told Putin he needed him to bug him because, he claimed, Yavlinsky was an American spy. ‘Putin told me that he’d refused him, because this is absolutely unacceptable. He’d said that if we return the FSB to Soviet times when it went after dissidents in politics, then we will destroy the security services. He said that if Yeltsin shared Primakov’s position, he was ready to resign over it.’[97]

None of these sentiments fitted in any way with Putin’s activities as deputy mayor in St Petersburg, when a ruthless alliance of the KGB and organised crime ruled the roost. Nor did they fit with Putin’s activities in Dresden, running illegals against the West. But still Yumashev claimed to have taken him seriously. Even now, after everything that has followed in Putin’s twenty-year rule, Yumashev said he has stuck to this view: ‘I am 100 per cent sure he was not playing me. In this case Putin really would have resigned, because he was absolutely aggressively against this. But of course Boris Nikolaevich would never have given the go-ahead.’[98]

Yumashev believed there was no way that during Putin’s time as deputy mayor of St Petersburg, Anatoly Sobchak’s ardent proclamations for democracy could have failed to rub off on him. But he appeared not to know, or not to want to know, the details of how St Petersburg had been actually run.

Putin was a past master at recruiting. In the KGB it had been his speciality, according to one former close associate.[99] ‘In KGB school, they teach you how to make a pleasant impression on the people you are speaking with. Putin learned this art to perfection,’ said a senior Russian foreign-intelligence operative. ‘In a small circle of people he could be extremely charming. He could charm anyone. And as a deputy, he was extremely effective. He carried out any tasks quickly and creatively, without worrying much about the methods.’[100]

If Yumashev was naïve, then in that year of intense pressure and attack on the Yeltsin Family from Primakov, so too perhaps was Boris Berezovsky, the wily, fast-talking oligarch who’d become the epitome of the insider dealing of the Yeltsin years, when a small coterie of businessmen bargained behind the scenes for prime assets and government posts. The former mathematician had earned his fortune running trading schemes for AvtoVAZ, the producer of the boxy Zhiguli car that symbolised the Soviet era, at a time when the car industry was steeped in organised crime. He’d survived an assassination attempt that decapitated his driver. Yet somehow he’d still found his way into the Kremlin. He’d hung out drinking tea in the office of Yeltsin’s chief bodyguard, Alexander Korzhakov, and then found his way into the graces of the president himself and his Family. All the while he cultivated ties among the leaders of Chechen separatists. Berezovsky’s LogoVAZ club, in a restored mansion in downtown Moscow, became an informal centre for government decision-making. At the height of his powers in 1996, the Yeltsin government’s ‘young reformers’ and oligarchs would gather there through the night to plot counter-coups against the hard-liners.

By 1999, however, Berezovsky was politically toxic. His relations with members of the Yeltsin Family had come under target. Not only had the raid on his Sibneft oil major threatened to expose dealings with the oil-trading company of Yeltsin’s daughter Tatyana’s then husband, Leonid Dyachenko, there was also a criminal investigation into his business operations through Aeroflot, the state’s national airline, in which he held a significant stake, and where the husband of Yeltsin’s second daughter, Elena, was president. The Family were seeking to jettison their relations with him. Rumours surfaced that his security company had been bugging the Family’s offices, and he’d been ousted in April from his Kremlin post as executive secretary of the Commonwealth of Independent States, as the loose alliance of former Soviet republics was then known. Yumashev, for one, had tired of dealing with him. ‘There was only so many times he could hear Berezovsky telling him he didn’t understand,’ said one close Berezovsky associate.[101] ‘He began to get on his nerves.’ Berezovsky seemed to have been abandoned by all. And so when Vladimir Putin turned up at the birthday party of his wife Lena early in 1999, he was deeply touched by the show of solidarity when everyone else had their knives out for him.

Putin’s gesture helped Berezovsky set aside qualms about his KGB past.[102] Initially, he’d chiefly supported Aksyonenko, the railways minister, as Yeltsin’s successor – his relations with Putin had chilled distinctly that year after Putin, as FSB chief, ordered the arrest and March 1999 jailing of the FSB officer closest to him, Alexander Litvinenko. But, faced with the constant threat of arrest, Berezovsky eventually fell in line behind Putin’s candidacy. Later, always a mythmaker about the extent of his influence in Yeltsin’s Kremlin, Berezovsky liked to claim that it was he who had helped bring Putin to power, by proposing him to Yumashev as FSB chief in the summer of 1998. He said he’d then held secret meetings with Putin in the lift of the FSB’s imposing Lubyanka headquarters, where they’d discussed Putin possibly running for the presidency.[103] The two men had met only fleetingly prior to that, when Berezovsky visited St Petersburg in the early nineties and Putin assisted him in opening his LogoVAZ car dealership there. That was a business riven with the mafia, and Berezovsky must have known about Putin’s links with organised crime there, said one Berezovsky associate: ‘Putin helped him in all questions connected to the sale of LogoVAZ cars in St Petersburg. This business was a mafia business, a bandit business, and in Moscow Berezovsky organised this with the help of Chechens and the corrupt bureaucracy. In St Petersburg he organised this with Putin’s help. Therefore he understood everything about his connections and his situation. He wasn’t a child.’[104]

But although Berezovsky was undoubtedly to play an enormous role in helping secure the defeat of Primakov later that year, he had never known or worked as closely with Putin as Pugachev had. And according to one of his closest associates, Alex Goldfarb, he never claimed to have been the one to introduce Putin to Yeltsin’s daughter Tatyana, or to suggest him as a replacement for Stepashin, or as Yeltsin’s successor.[105]

*

The moment everything changed came in the middle of July, in the dog days of the Moscow summer, when the Kremlin was emptying and many, including Yeltsin, were away on vacation. It was then that the Swiss prosecutors presented the Yeltsin Family with another shock. They’d thought the Mabetex case had been dealt with – Skuratov had been suspended from his position for several months by then, as a result of the criminal case Pugachev had helped open. But the Swiss were still active – and so were Skuratov’s deputies. On July 14, the Swiss prosecutors announced that they’d opened a criminal case into money laundering through Swiss bank accounts by twenty-four Russians, including Pavel Borodin and other senior Kremlin officials, and alleged that the funds may have been obtained through ‘corruption or abuse of power’. When asked whether the list included Yeltsin’s daughter Tatyana, one of the Swiss investigating magistrates answered, ‘Not yet.’[106] It was clear that they were circling, and according to Pugachev, a fresh sense of panic set in.

The Geneva prosecutors said their Russian partners were still conducting a parallel inquiry. It was then, Pugachev said, that he decided to act: ‘We needed someone who would be able to deal with it all. Stepashin wasn’t going to do it. But there was Putin with the FSB, the Security Council, Patrushev. There was an entire team.’[107] Pugachev remembered Putin’s coolness when he handled the Skuratov tape, and said he decided to introduce him to Yeltsin’s daughter Tatyana, who in those days was still the main channel to the president. As if on cue, a day later Putin’s FSB had taken action, opening a criminal investigation into the construction business owned by the wife of the Yeltsins’ political opponent, the Moscow mayor Yury Luzhkov.[108] Pugachev had first sought to undermine Tatyana’s view of Stepashin, demonstrating to her how, unlike Putin, he had failed to vigorously defend the tape of Skuratov and the prostitutes after it had been aired on TV. ‘I told her, “Tanya, look. You need a person who will save you. Stepashin will make compromises with the Communists. He will compromise us in front of our eyes. Look at how he is now.”’[109] Then he said he’d taken Putin from his office in the Kremlin’s Security Council to her. ‘I told her Putin was a much clearer person. He is young and listens attentively. Stepashin doesn’t listen any more.’ Pugachev claimed that Yumashev later persuaded her to go to her father and convince him to make the switch.

Yumashev insisted, however, that Pugachev played no role in Putin’s rise, while the criminal case in Switzerland and the investigation in the US had never posed a threat at all: ‘Of course, it was total rubbish that this was dangerous,’ Yumashev said. ‘The only thought I had – and Voloshin shared this view, and Yeltsin too – was that power was being given to a person who mentally, ideologically and politically was exactly the same as us. We’d worked together in the Kremlin as one team. There was an absolutely common understanding with Putin on how the world should work and how Russia should work.’[110]

But these were the days when everything was decided. Stepashin’s world – and the chances for a more liberal administration – were to be swept away. There was no pressing reason to risk replacing Stepashin with Putin, a relatively unknown official, unless the Yeltsin Family needed someone they considered more loyal – and more ruthless – because of the risk presented by the escalating Mabetex probe. Yumashev tried to explain the switch with lame-sounding reasons, for instance that Stepashin was under the thumb of his wife. He liked to tell long, contorted tales of the many arguments he’d made in those days for why they had to act quickly, before it was too late to replace Stepashin, who just was not the right fit. But no explanation other than the rising panic over the Swiss probe made any sense. This was the motive the Yeltsin Family never wanted told, for it revealed how the Family’s rush to save itself was the inadvertent cause of Putin’s rise and its world’s demise. They needed a tough guy to protect their interests, and got more than they bargained for. In his authorised narrative, Yumashev didn’t want to give credence to any of this. Pugachev was the narrator who strayed from the Kremlin’s official version, and appears to have told the truth.[111]

At first Yeltsin had hesitated. But in the last week of July, Chechen rebels began to mount armed attacks on the border with Dagestan, the mountainous region neighbouring the breakaway Chechen republic, and, Yumashev claimed, Stepashin appeared to struggle to deal with it.[112] Before he made his first trip as prime minister to Washington, DC, on July 27, he’d publicly vowed that there would be no new war against Chechnya. But almost every day in the week that followed his return, clashes on the border broke out. At the weekend, on August 8, there was a massive escalation in fighting as two to three hundred armed Chechen insurgents seized control of two villages in Dagestan. Yeltsin’s efforts to retain him as prime minister were running out. Even then, at the last minute Anatoly Chubais, who worked closely with Stepashin, had nearly derailed Pugachev and the Yeltsin Family’s plans when he’d got wind that a replacement was being lined up. Chubais tried to reach Yeltsin at his dacha the weekend before the announcement was to be made, and to talk him out of it. But he only reached the security guard, who promptly relayed his request to Pugachev.

Furious at this attempt to undermine his plans, Pugachev said he made sure the security guard never told Yeltsin about Chubais’ call: ‘I’d worked constantly for the last eight months to get Putin into power. I turned Putin from being a total nobody who’d been head of the FSB into this, a real pretender for power. I’d monitored and checked ceaselessly. And where was Chubais when we had to deal with the Mabetex scandal?’ he raged. ‘Where was he? What did he do? He’d completely disappeared.’[113]

Even then, when they all met in Yeltsin’s office early that Monday, August 9, Yeltsin had still hesitated, said Pugachev. Stepashin refused to step down without a vote by parliament, and Yeltsin had left his office to think again. ‘I remember the whole story,’ said Pugachev. ‘Stepashin told Yeltsin Putin was no one, that he would not stand for it. But everything had already been decided. It was a rare case when Yeltsin decided nothing himself. It was a matter of life and death.’[114]

When Yeltsin finally made the announcement later that day, the nation was stunned by the identity of their new prime minister. Putin was a little-known bureaucrat, a grey figure who rarely appeared on the news. The country’s news outlets scrambled to put together biographies of him. What shocked the nation most of all was that Yeltsin openly named him as the man he hoped would succeed him as president, announcing in a televised address: ‘I decided to name the person who in my opinion will be able to consolidate society based on the broadest political forces, to ensure the continuation of reforms in Russia. He will be able to unite those around him who, in the twenty-first century, have the task of renewing Russia as a great nation. This person is the secretary of the Security Council, the director of the Federal Security Service, Vladimir Vladimirovich Putin.’[115]

Putin had accomplished the most vertiginous leap of his dizzying career. The Russian parliament was in shock, although most believed he was a nobody who later could easily be defeated, and this helped squeeze his appointment as prime minister through a confirmation vote.[116] By that time, Primakov had re-emerged from the political sidelines to form a bold new alliance with Yury Luzhkov, the powerful Moscow mayor, for the upcoming parliamentary elections. By comparison, said Yumashev, ‘Putin looked like a child.’[117] But many in the Kremlin still worried that Yeltsin had gone too far in naming him as his preferred successor. ‘Many of our colleagues considered that Yeltsin categorically should not do this – because Putin was an unknown entity and Yeltsin only had 5 per cent political support. They thought that after such an announcement Putin would never win,’ Yumashev said.

To the outside world, it seemed the Yeltsin Family were taking an enormous risk. But other plans were afoot. An escalation of a Russian military offensive against Chechnya had already been under discussion, Stepashin said later.[118] Most important for the bureaucrats and spin doctors inside the Kremlin was to transform the awkward-seeming candidate they’d been presented with into a force to be reckoned with. At first glance, the material didn’t seem very promising. People still talked over Putin in meetings. The plan was to cast him in the image of one of the most popular fictional TV heroes from Soviet times. He was to be a modern-day Max Otto von Shtirlitz, an undercover spy who’d gone deep behind enemy lines to infiltrate the command networks of Nazi Germany. Putin would be the kandidat rezident, the spy candidate, a patriot who would restore the Russian state.[119] Their main task was to distinguish him from the Yeltsin Family – so that the public would see him as independent. His youth, cast against the ageing and ailing Yeltsin, was meant to give him an immediate advantage, while Kremlin-linked TV channels sought to portray him acting decisively against the separatist incursion into Dagestan. In the background, Berezovsky was perfectly capable of trying to organise a small victorious war to help spur Putin’s vault to power, two of his close associates said.[120]

In the rush to help engineer his ascent, Pugachev had paid little attention to warning signs of Putin’s duplicity. That July, when Pugachev had attempted to deal with the fallout of the Swiss prosecutors’ case, holding talks in the Kremlin late into the night with Putin, Patrushev and Voloshin to try to persuade the acting prosecutor general, Yury Chaika, to step down in favour of an even more loyal ally, Putin had apparently played a double game. Chaika initially resisted, only to agree a few days later after separate talks with Pugachev, during which he warned him that Putin’s allegiance to the Kremlin might not be clear-cut: ‘With Putin you need to be careful,’ he said. ‘When you all met with me in the Kremlin and tried to persuade me for six hours to step down, Putin accompanied me out of the Kremlin after it was all finished. He told me I was right not to agree. He told me if I did it would be a crime.’[121]

But Pugachev promptly forgot Chaika’s warning. The scandal over Mabetex was still refusing to die down despite all the manoeuvrings, and at the end of August calamity hit, when details of how the probe was linked to the Yeltsin Family finally broke into the open. The Italian newspaper Corriere della Sera published an article that disclosed how Mabetex’s owner Behdjet Pacolli had issued the credit cards to the Yeltsin Family and covered the payments for them.[122] The paper said the Swiss prosecutors suspected the payments were bribes in return for the Kremlin renovation contract. It named Felipe Turover as the central witness for these claims.

The news hit Yeltsin’s Kremlin hard.[123] Till then, only they – and the prosecutor – had known how far the probe might go. Pugachev once again scurried to assist. ‘Tanya was totally flabbergasted when the press reports appeared,’ he said. ‘But I promised her I would make it go away.’[124] He invited the Yeltsin Family to open accounts at his own Mezhprombank, and then told the media that the credit cards in question had first been issued years ago, through his bank. The move was designed to confuse the press and remove questions over whether Yeltsin had broken the law by holding a foreign bank account.[125]

In Pugachev’s eyes, the whole case was unfair. Yeltsin, he said, had never even understood what money was. On one occasion, drunk, he’d asked his chief bodyguard, Alexander Korzhakov, to buy him vodka, and had pulled a wad of notes out of a safe in his room. This, said Pugachev, was where he’d kept the royalties for the books he’d written with Yumashev. Yeltsin had pulled out $100. ‘He asked Korzhakov if this was enough. He had no idea what money was, or how much things were worth. He never handled this himself.’ Almost no money had ever been spent on the credit card issued in Yeltsin’s name – only some for an official visit to Budapest. His daughters, however, had spent considerably more. ‘Tanya could spend $100,000 a month on furs,’ said Pugachev. But none of them understood what a credit card was, or how it worked or what it signified: ‘They would just go out with this piece of plastic and use it to buy things. They didn’t understand that someone had to pay for it.’[126]

Yumashev said they’d been convinced that the cards were financed by Yeltsin’s royalties from his memoirs. Borodin, the Kremlin Property Department chief, had told them so, he said: ‘They absolutely sincerely spent this money believing it was from the royalties of the books. But I don’t doubt that this stupidity of Borodin could be used by all kinds of forces against us, including Primakov and Skuratov.’[127]

Clouds were looming ever larger on the horizon, and the money trail had the potential to go further still. On the first anniversary of the August 1998 financial crisis, the New York Times broke the news of yet another Russian financial scandal.[128] US law-enforcement agencies were investigating billions of dollars in suspected money-laundering transactions through the Bank of New York by Russian organised crime. A month later, reports of a link to the Yeltsin Family emerged. Investigators had traced the $2.7 million transfer to two accounts held with the Bank of New York in the Cayman Islands, held in the name of Tatyana’s then husband, Leonid Dyachenko.[129] Later, documents from the Swiss prosecutors’ office showed that they were also investigating a much bigger transfer through Banco del Gottardo to an account beneficially owned by Tatyana.[130] No charges were ever pressed and Yumashev said any suggestion that Tatyana had ever received such funds was ‘absolute lies’.

But amid the mounting tension and the scramble to save themselves from attack, Pugachev had brushed aside a warning from Putin’s former mentor Anatoly Sobchak, who’d told him he was making a great mistake: ‘I thought maybe he was jealous. But of course he knew it all.’[131] He’d forgotten about Berezovsky’s own qualms when he told him, ‘Sergei, this is the biggest mistake of your life. He comes from a tainted circle. A komitetchik cannot change. You don’t understand who Putin is.’[132] He’d forgotten, too, about his own deep hatred of the KGB, about how he’d run and dodged from them long ago when he was trading currency as a teenager in the tourist hotels of Leningrad. He’d forgotten Chaika’s warning, and nobody – not even Pugachev – noticed that Putin still met frequently with Primakov, who was meant to be the arch-enemy, after he’d been fired as prime minister. It turned out that Putin had taken the entire top ranks of the FSB to Primakov’s dacha, where they toasted him, and in October that year Putin attended Primakov’s seventieth birthday celebrations and gave a speech lauding him.[133]

Pugachev and the Yeltsin Family had closed their eyes to all this. They wanted above all to believe that Putin was one of them. That summer of intensifying investigations had left them desperately seeking a successor from among the security men who could protect them. Somehow they came to believe that Putin was the only candidate capable of that. Increasingly impaired by illness, Yeltsin seemed forced to go along with them. Ever since Primakov had been appointed prime minister in the wake of the August 1998 financial crisis, the Yeltsin Family had believed there was no alternative to appointing someone from outside the siloviki as a replacement. In the financial collapse, liberal ideals and the young reformers among whom Yeltsin had once been searching for his successor had become tainted. ‘We swallowed so much freedom we were poisoned by it,’ Yumashev later said wryly.[134]

Putin’s lip service to market and democratic principles had helped the Family believe he would continue their course. But paramount in their calculations had been his daredevil operation to whisk his former mentor Anatoly Sobchak out of Russia and away from the threat of arrest. ‘This show of loyalty was counted … as a weighty factor in choosing him,’ said Gleb Pavlovsky, a Kremlin adviser and spin doctor at the time.[135] The Family knew that, much more than Stepashin, Putin was ruthless enough to break the law to protect his allies if necessary.

Besides, Pugachev said, Putin seemed loyal and obedient. He still thought of him as someone who followed him like a dog, and still identified him with Sobchak’s liberal and democratic beliefs: ‘My feeling was that if he was close to Sobchak then he should be a person of liberal views. I didn’t study closely what he represented.’ What’s more, Putin had seemed reluctant to take on the post of prime minister. He had had to twist his arm, he said, and tell him it was not for long, only till the situation was stable.

What Pugachev didn’t know was that Putin had once worked closely with one of the main players in the attempt to overthrow the Yeltsin regime. He wasn’t aware that Felipe Turover, the KGB officer behind the leaks on Mabetex and the Yeltsin accounts, with connections to the top of the KGB’s legendary black-ops department, had helped Putin set up the oil-for-food barter scheme in St Petersburg.

He’d never heard the story Turover told me, about how after Yeltsin’s chief bodyguard had allegedly given the order to eliminate Turover when his name was leaked to the Italian newspaper that August, Putin had gone to see his old associate, who was then in Moscow, warned him about the order and told him he should leave the country, fast: ‘He told me to leave because he had an order from the president to finish me off. He told me I could leave under his guarantee.’

Pugachev didn’t know that all the while, Putin had played all sides. ‘He always kept his promises,’ said Turover. ‘He never worked for the Family against Primakov. And he only worked formally against Skuratov.’[136]

Pugachev also had little inkling that Putin could represent anything close to a Plan B of the KGB, after the Primakov takeover failed. He always claimed he thought of Putin as someone he could control. He didn’t realise that he might have been lying to the Family when he appeared to support them. Putin ‘deceived them’, said Turover. ‘Warfare is based on deception. This is the strategy of Sun Tzu. He wrote The Art of War 2,600 years ago,’ referring to the ancient Chinese military treatise. ‘Putin learned his judo lessons well.’