Putin's Kleptocracy_Who Owns Russia? Read online

  This book does not look in detail at what is happening in Russia today; instead I seek to ascertain the authoritarian moment in Russia. The story starts with the collapse of the USSR, when, as the archives of the Communist Party of the Soviet Union (CPSU) reveal, the KGB moved the CPSU’s vast financial reserves offshore, out from under President Mikhayl Gorbachev’s control, thus further crippling his regime. The August 1991 coup by Communist and KGB hardliners failed, but aspirations for revanche remained. One of the chief PR strategists of Putin’s 2000 victory, Gleb Pavlovskiy, subsequently put it like this, after he had been sacked by the Kremlin: “Putin belongs to a very extensive but politically invisible layer of people who after the end of the 1980s were looking for a ‘revanche’ in connection with the fall of the Soviet Union.”13 The 1990s was spent preparing for that moment.

  Vladimir Putin spent his entire early life yearning to join and was finally accepted into the KGB. By his own account, his favorite songs are Soviet standards, not Western rock. He has been deeply conservative his whole life. Yet he has also been a keen collector of every possible trapping of material wealth. When he was stationed in East Germany, he had the leaders of the German Red Army Faction (also known as the Baader-Meinhof Group) steal speaker systems for him when they had a moment free from their terror campaigns. Back in Russia in the early 1990s, Putin acquired a substantial country house, or dacha, and an apartment in the most prestigious section of St. Petersburg within his first years of working in the city; neither of these could have been purchased with his meager official salary.

  This pattern of uncontrollable greed, of wanting what rightfully belongs to others, which Masha Gessen calls pleonexia,14 has resulted in over twenty official residences, fifty-eight planes, and four yachts. Sadly for Russians, Putin does not “own” any of these, except his St. Petersburg properties and perhaps his first yacht, the Olympia, which was presented to him as a gift by a group of oligarchs headed by Roman Abramovich just prior to Putin’s becoming president in 2000 and delivered in 2002. Without the presidency Putin theoretically would not be allowed to keep any of these accoutrements of power, except perhaps for the $700,000 in watches that he routinely sports—six times his declared annual income, a subject of constant Russian journalistic interest.15 Thus his motivation to leave power is reduced to zero. Those who say politicians can’t be called corrupt unless the police find $20,000 in small bills in their freezer, or who say “But the U.S. presidents have Camp David,” should contemplate how much has been spent from public funds on the construction, maintenance, furnishing, and round-the-clock staffing of these twenty residences, most of which did not exist, or at least not in their current gilded state, prior to Putin’s rule.

  The demands of this tribute system have meant that the cost of doing business in Russia has escalated to such an extent that Russian and foreign businesses alike wonder whether they can even turn a profit. The global Swedish furniture chain Ikea threatened to call it quits after years of trying to run a clean business in Russia. When the head of Ikea Russia, Lennart Dahlgren, left the company in 2006, he revealed that they had been subjected to years of legal traps that they sought to solve by meeting personally with Putin. But a high-ranking official told them that a meeting with Putin would cost $5 million to $10 million. Stating that he didn’t know whether they were speaking seriously or joking, Dahlgren told reporters: “I sensed that it would be better not to get into that discussion any deeper.”16

  A democracy is easier to research than a dictatorship. Even so, nondemocratic actions in a democracy, like corruption, are less easy to research than candidates’ public speeches, for example. When the subject of study is how, when, and why Russian elites decided to take the country away from democracy, obviously no one from this group is giving public interviews, and if they do, as happened with Aleksandr Litvinenko, they suffer a cruel death.

  More difficult to research are Russian elites’ private financial motivations for taking certain actions and the clan conflicts within the elite that produce sometimes contradictory public results. I spent almost eight years studying archival sources, the accounts of Russian insiders, the results of investigative journalism in the United States, Britain, Germany, Finland, France, and Italy, and all of this was backed by extensive interviews with Western officials who served in Moscow and St. Petersburg and were consulted on background. Based on all this, I believe it is possible to construct a credible picture of Putin’s rise. I also consulted with and used many accounts by opposition figures, Russian analysts, and exiled figures who used to be part of the Kremlin elite. These have become an increasingly credible source of information, particularly as the number of émigrés increases.

  Above all I have relied on the work of Russian journalists who wrote this story when the Russian media was still free. Many of them died for this story, and their work has largely been scrubbed from the Internet, or (as I discovered several times) infected with viruses attached to online documents, leading to computer crashes. Whole runs of critical newspapers have disappeared from Russian libraries. But “they” always forget to remove them all, and many Russians still keep clippings, reminiscent of a previous era when the state similarly ended press freedoms.

  Finally, the dump of nonredacted cables from Wikileaks is very regrettable but also a completely fascinating source of information. For example, a 2010 cable from America’s ambassador in Moscow John Beyrle to the U.S. secretary of state provided the following description of how money, elections, criminal activity, and the Kremlin interact:

  XXX [name redacted by author] stated that everything depends on the Kremlin and he thought that . . . many mayors and governors pay off key insiders in the Kremlin. XXX argued that the vertical works because people are paying bribes all the way to the top. He told us that people often witness officials going into the Kremlin with large suitcases and bodyguards full of money. The governors also collect money based on bribes, almost resembling a tax system, throughout their regions. He described how there are parallel structures in the regions in which people are able to pay their leaders. For instance, the FSB, MVD [Ministry of Internal Affairs], and militia all have distinct money collection systems. Further, XXX told us that deputies generally have to buy their seats in the government. They need money to get to the top, but once they are there, their positions become quite lucrative money making opportunities.17

  Vladimir Putin is both a product and a producer of this pervasive system of corruption. Of course, he is not the only Eurasian or Western leader to have collected gifts and tributes. But to have created with this clique an entire system that spans eleven time zones is by any account an impressive achievement. I argue that the outlines of the authoritarian and kleptocratic system were clear by the end of Putin’s first one hundred days in 2000. It is a story that begins even before the collapse of the USSR.

  * * *

  I. U.S. government anonymous leaks in 2014 claimed that Putin had spent illicit funds since the early 2000s on the unrivaled acquisition of luxury items, including his twenty presidential residences; that he had siphoned off cash from Gazprom to the tune of 70 percent of its capital expenditures; and that he controlled an estimated 4.5 percent of Gazprom, 37 percent of shares in Surgutneftegaz, and 50 percent of Gunvor. See Bill Gertz. “Putin Corruption Network Revealed,” Washington (DC) Free Beacon, April 7, 2014, http://freebeacon.com/national-security/putin-corruption-network-revealed/.

  II. This redirection in my research was particularly reflected in several earlier works, including Eastern Europe, Gorbachev and Reform (1990); Russia and the New States of Eurasia: The Politics of Upheaval (1994), coauthored with Bruce Parrott; and two series coedited with Bruce Parrott, the four-volume Democratization and Authoritarianism in Postcommunist Societies (1997) and the ten-volume The International Politics of Eurasia (1994–97).8

  III. Most books in this genre were influenced by the writings of Samuel Huntington, The Third Wave: Democratization in the Late Twentieth Century (1991). Bu
t in addition to these institutional perspectives, theories derived from economics and public choice also were used to bolster the claim that over time, democracy would emerge in Russia, as in Mancur Olson’s Power and Prosperity (2000).9

  IV. The field has a rich collection of books on democracy in Russia (e.g., McFaul 2001; Fish 2005; Sakwa 2011), and all of them are full of foreboding about democracy’s limits and failings. But there are no Western academic accounts of the origins and development of authoritarianism as an elite project in Russia. Henry Hale’s early discussion of stalled party development, Why Not Parties in Russia (2007), Regina Smyth’s (2006) book on the impact on democracy’s “grand strategy” of rational actor microchoices made by candidates in Russia’s mixed electoral system, Brian Taylor’s study of the power ministries, State Building in Putin’s Russia (2011), the books by Gulnaz Sharafutdinova (2011) and Thomas Remington (2011) on the political economy of Russia’s regions, and Michael Urban’s book on elite discourse, Cultures of Power (2010), are notable exceptions, although they each deal with only one aspect of the building of authoritarianism in Russia. The serious contributions by Russian analysts on this subject are too numerous to mention and are discussed in depth throughout this book. Wider works on competitive authoritarianism certainly exist, including excellent contributions by Levitsky and Way (2010), Gandhi (2008), and Brownlee (2007).10

  Chapter One

  The USSR at the Moment of Collapse

  IN DECEMBER 2012, in a judicial hearing in London into the death of Aleksandr Litvinenko, a former operative for the Russian FSB who for some time had been a virulent critic of President Vladimir Putin, Hugh Davies, the counsel to the inquest, stated that evidence possessed by the British government established “a prima facie case in the culpability of the Russian state in the death of Alexander Litvinenko.”1 In July 2014, as relations with Russia deteriorated, British prime minister David Cameron announced he would let the public inquest proceed. At the center of the inquiry was a claim by Litvinenko’s widow that, at the time of his 2006 death by polonium-210 poisoning, he was providing evidence to Spanish authorities about “Russian mafia links to the Kremlin and Vladimir Putin.”2

  The inquest pointed to the tangled web of relations between the Russian state and the mafia, relations that were known to Western governments and much discussed in U.S. cables released by Wikileaks. In particular, a series of events in Spain underlined what had become an interlocking network of associations and clan-based politics centered on Putin. First there was the arrest in Spain in 2008 of the reputed leaders of the St. Petersburg–based Tambov-Malyshev organized crime group,I including Gennadiy Petrov and Aleksandr Malyshev. Then there was the warrant for the arrest of Vladislav Reznik, who was the cochairman of the ruling United Russia Party and chairman of the Duma’s Finance Committee.3, II Finally, there was the revelation that Communications Minister Leonid Reyman owned a beachfront house in the same resort in Majorca as Petrov, who introduced him to potential Spanish partners, and that Reyman himself was under investigation by Spanish authorities.5

  All those under investigation in Spain came from St. Petersburg, and all were close associates of Putin, as they rose up together from the early 1990s onward. This incident goes to the heart of whether, as Spanish prosecutors stated in classified briefings to U.S. and other Western governments, made public via Wikileaks, Russia under Putin had become a virtual “mafia state”6 in which state structures operate hand in glove with criminal structures to their mutual benefit, with the mafia operating within guidelines established by top Kremlin elites for the purpose of strengthening Putin’s hold on power, silencing critics, and maximizing mutual economic benefits.

  Briefing U.S. officials behind closed doors, the Spanish prosecutor called Russia, Chechnya, and Belarus “mafia states” and stated that in such countries “one cannot differentiate between the activities of the government and OC [organized crime] groups.” Further, the security services “control OC in Russia. . . . The FSB is ‘absorbing’ the Russia mafia” and using them for black operations as a price for operating on Russian territory. But at the same time, the prosecutor told U.S. officials, Russian organized crime responds to pressure by taking advantage of “the corruption of high-level ministers.” Extensive wiretaps showed that these Russian organized crime leaders had a “ ‘dangerously close’ level of contact with senior Russian officials.”7 The secret cable reported Spanish press allegations that the Spanish government had compiled a list of Russian procurators, senior military officers, and politicians, including current and former ministers, who were involved with Petrov and Russian organized crime. The list included at least four sitting ministers, including the Russian minister of defense at that time, Anatoliy Serdyukov, who was notable for his “very close ties” to Petrov.8 The cable that was released also referenced other classified lists of compromised officials that were not part of the Wikileaks documents but indicate that the U.S. government has had a very specific idea of the officials involved in links between the Russian government and Russian organized crime since at least 2008.III

  The questions arising from this fascinating story are many: What kind of system has Putin created? When did these plans emerge? Who is at the center of them along with Putin? What kind of control does Putin have over the plans themselves? I suggest that the antidemocratic and politically illiberal aspects of the plans were present from the beginning, as were the efforts to create a liberal economic system that would allow Russians to enjoy the fruits of their labors more than at any time in their history. The plan was always that those closest to power would be in a position to enjoy those fruits on an unprecedented scale. The story starts when the Soviet Union was still standing, if declining, in the 1970s and 1980s.

  Beginning in the 1970s, when the Soviet leadership started to enter the world economy to sell oil in exchange for technology (some of it bought illegally at high prices) and grain to offset the structural problems in their own economy, they began to accumulate funds in hard currency abroad. Conflicts in the Middle East quadrupled the price of oil in the 1970s, thus massively increasing the amounts in Soviet overseas accounts. These accounts were under the strict day-to-day control of the KGB and were used to fund foreign operations, underwrite friendly parties and movements, and purchase goods for import. The strategic decisions about how the money would be spent were made by the Communist Party hierarchy, while the KGB was in charge of implementation. However, under Soviet president Mikhayl Gorbachev there is reason to think that the KGB declined to repatriate funds and only increased the economic crisis of a leadership in which they had no confidence. Indeed even more funds began to flood out of the USSR in the late 1980s for safekeeping abroad. As one well-placed Russian cooperative owner observed in 1989, “The West thinks the KGB is gone. They [the KGB] are no longer concerned with investigating people, but they are very involved in destabilizing perestroika. Last week the KGB created a new division of forty agents to do nothing but start joint ventures with Western firms. This is their experimental sociological work. If the crowds rush in tomorrow to kill Gorbachev, the KGB will do nothing because they are concentrating on their scientific experiments.”9

  When the newly elected Russian president Boris Yel’tsin banned the CPSU after the failed 1991 August coup against Gorbachev, the CPSU’s guidance ceased, and the control over this vast mountain of foreign money fell to KGB agents who had access to foreign operations and accounts. Some of the money stayed abroad and disappeared, but when the USSR collapsed and assets became available for purchase inside the country, this money was available for investment to those who controlled the accounts. Thus were born, it is estimated, most of Russia’s oligarchs and commercial banks. By the early 1990s KGB veterans who knew the details of these accounts needed like-minded officials in key positions who could help control who would get to invest in Russia and who would not.10 For this they found willing allies among the KGB and Party veterans who flooded into the new cooperative movement in the late 1980
s11 and who then sought to build capitalism, enrich themselves, and control market entry. Among these was the rather more junior KGB official Vladimir Putin. And in trying to control what kind of economy would emerge, they were up against a formidable and historic collapse.

  Some people visualize Russia in the late 1990s as a country that went through a “Wild West” period, or something similar to Al Capone’s reign in Chicago. But in 1999 a prominent expert stated in testimony before the U.S. Congress:

  For the U.S. to be like Russia is today, it would be necessary to have massive corruption by the majority of the members of Congress as well as by the Departments of Justice and Treasury, and agents of the FBI, CIA, DIA [Defense Intelligence Agency], IRS, Marshal Service, Border Patrol, state and local police officers, the Federal Reserve Bank, Supreme Court justices, U.S. District court judges, support of the varied Organized Crime families, the leadership of the Fortune 500 companies, at least half of the banks in the U.S., and the New York Stock Exchange. This cabal would then have to seize the gold at Fort Knox and the federal assets deposited in the entire banking system. It would have to take control of the key industries such as oil, natural gas, mining, precious and semi-precious metals, forestry, cotton, construction, insurance, and banking industries—and then claim these items to be their private property. The legal system would have to nullify most of the key provisions against corruption, conflict of interest, criminal conspiracy, money laundering, economic fraud and weaken tax evasion laws. This unholy alliance would then have to spend about 50% of its billions in profits to bribe officials that remained in government and be the primary supporters of all of the political candidates. Then, most of the stolen funds, excess profits and bribes would have to be sent to off-shore banks for safekeeping. Finally, while claiming that the country was literally bankrupt and needed vast infusions of foreign aid to survive, this conspiratorial group would invest billions in spreading illegal activities to developed foreign countries. . . . The President would not only be aware of all these activities but would support them.12