Putin's Kleptocracy_Who Owns Russia? Read online

  This statement was made in testimony to the U.S. House Committee on Banking and Financial Services by Richard L. Palmer, who had been CIA chief of base and chief of station in countries of the former Soviet Union. When Palmer gave his testimony in September 1999, Putin was not yet president, but he was prime minister, he had been head of the successor organization to the KGB, the Federal Security Service, and he had been investigated on a number of occasions for high-level corruption and criminal activity.

  Of course, there were those in the Russian government who were aware of the problem and had tried to correct it. On February 18, 1992, for example, the Yel’tsin-Gaidar government signed an agreement with an American corporate private investigation firm, Kroll Associates, to track down and help repatriate money illegally held or taken abroad by former Communist Party and Soviet government agencies, including the KGB. The money had allegedly left the country prior to the August 1991 attempted coup against the reformist-oriented Gorbachev by conservatives in the highest echelons of the ruling Communist Party and the KGB.13 A group of Central Committee officials, including the head of the Party department dealing with the defense industry, the head of state television and radio, and the deputy head of the committee in charge of privatizing state property, were all dismissed after revelations about their involvement in embezzlement and capital flight. Several of them had also been involved in efforts during the Gorbachev period by a so-called patriotic wing of the special services to organize various provocations to undermine Gorbachev and prove that his reforms needed to be halted. Yegor Gaidar, who at that time was the minister of finance, stated that this kind of activity was not only illegal but constituted continued political resistance to the government’s economic reform efforts: “Last year saw large-scale privatization by the nomenklatura [the high-ranking elite], privatization by officials for their own personal benefit.”14 The New York Times reported that the office of the Russian procurator general had been “unable to penetrate the maze of hidden bank accounts and secret investments, left behind by party officials acting in some cases . . . with the cooperation of the K.G.B. . . . One estimate for the party’s hidden assets is $50 billion.”15 Kroll, which had also led the hunt for stolen funds from the Marcos regime in the Philippines and Saddam Hussein’s invasion of Kuwait, was reported to have “found that thousands of mostly offshore bank accounts, real estate holdings and offshore companies had been set up to launder and shelter these funds and what had been the Soviet Union’s gold reserves.”16, IV

  In response to this report and their own investigations, the Yel’tsin government passed a law giving it the right to confiscate funds taken abroad illegally. Yel’tsin was receiving monthly updates from Kroll; the lower house of the Russian Supreme Soviet, the Council of Nationalities (as it was called until December 1993), demanded that the Foreign Intelligence ServiceV provide a report on Kroll’s progress, which Izvestiya reported was provided in a closed session by First Deputy Director Vyacheslav Trubnikov.18 The Supreme Soviet Presidium had decreed that a special commission be established by the procurator general to investigate corruption, abuse of power, and economic offenses. Its report was presented to the Supreme Soviet in September 1993. In it Kroll’s efforts were noted; the document recounted widespread instances of “bribery of officials, blackmail, and the illegal transfer of currency resources to foreign banks,” with specific ministers sanctioned by name, including Minister of Foreign Economic Relations Pyotr Aven (whose activities in approving Putin’s early contracts as head of the St. Petersburg Committee for Foreign LiaisonVI are dealt with below). The report also criticized the Ministry of Security (the precursor of the FSB) for the fact that while it had opened three hundred investigations in the first six months of 1993 alone, only “two criminal cases had been instituted in practice.”19 In theory, in both Yel’tsin’s camp and in the Communist-dominated legislature, everyone was seeking to stanch the flow. But nothing happened in practice. As one of Kroll’s investigators stated, the report raised “suspicions about certain players and institutions [in the former Soviet Union]. Our problem is that when we sent it to Moscow, it was never followed up.”20

  This image of high-level culpability was reinforced when U.S. law enforcement intercepted telephone calls in the United States from the highest officials in President Yel’tsin’s office, Prime Minister Viktor Chernomyrdin’s staff, and other ministers to and from the head of the Russian firm Golden ADA, established in San Francisco, linking the firm to various scams that collectively added up to almost $1 billion.21 The size of the scams is suggested by the fact that in 1994 Golden ADA had a declared taxable income in the United States of $111,485,984, according to U.S. court documents.22 FBI records show that the FBI turned over to Russia information linking Golden ADA with Yevgeniy Bychkov, the chairman of the Russian Committee for Precious Gems and Metals, and Igor Moskovskiy, a deputy minister of finance. Eventually, in 2001, with documents provided by FBI wiretaps, as the FBI website wryly states, both “were convicted of abusing their state positions and immediately granted State Duma amnesties.”23 At an Aspen Conference in St. Petersburg in the early 1990s, I asked a high-ranking U.S. government official, “How many Russian government ministers have bank accounts abroad in excess of $1 million?” The reply came back immediately and without hesitation: “All of them. Every last one.” This was the general view of what was going on throughout the entire country at the time, a view reaffirmed by subsequent Russian journalistic investigations.24

  While capital flight quickly became a broader problem involving economic entrepreneurs and industrial enterprises, the problem began with the privileged access to Soviet state reserves by insider KGB and CPSU elites. The story began when KGB chairman Vladimir Kryuchkov convinced Gorbachev to use KGB-trained economists to stimulate and control an opening for Western investors in the USSR and increased Soviet investments abroad.25 Kryuchkov and the top leadership in the KGB distrusted Gorbachev and his policies and feared that he would lose control of the country.VII Having received permission from the leader of the CPSU to control the process of opening up to the West, the top KGB leaders lost no time in ensuring that their institutional interests were secured. Russian and foreign journalists worked to put together the story of what had happened to the USSR’s reserves, and all signs pointed to efforts beginning in 1990, if not earlier, to prepare for the possible collapse of power. Looking at the situation in eastern Europe, where Communist regimes had fallen without so much as a whimper, these investigative accounts suggest that Soviet KGB hardliners clearly acted to resist any similar assault. And they did this in collaboration with hardliners in the Party and with the support of Politburo decisions, specifically an August 23, 1990, Central Committee decree that authorized “urgent measures on the organization of commercial and foreign economic activities of the Party.”

  Issued over the signature of Vladimir Ivashko, the deputy general secretary of the CPSU at the time, the memo expressed the need to develop an “autonomous channel into the party’s cash box,” in preparation for the time when the CPSU might not be the only party in the USSR. The memo called for specific measures to protect the Party’s “economic interests”: form new economic structures abroad to provide the basis for “invisible party economics”; establish a foreign bank for the Central Committee that would “conduct currency operations”; and consult with the relevant state institutions to use “national property for the foreign economic work of the Party, [including] the property left after the Soviet armies left Czechoslovakia, Hungary and the German Democratic Republic.” To achieve these ends, “there must be a strict observance of discreet confidentiality and the use of anonymous facades to disguise the direct use of money to the CPSU. The final objective is to build a structure of ‘invisible’ party economics. . . ; a very narrow circle of people have been allowed access to this structure. . . . All this is confirmed by the experiences of many parties, working for decades within a framework of multiparty cooperation and market economics.”26, VIII


  To this end, a colonel in the KGB First Chief Directorate,IX Leonid Veselovskiy, was transferred to the Central Committee’s Administrative Department. A memo attributed to him was later uncovered by Paul Klebnikov, the American editor of Forbes Russia, assassinated in Moscow in 2004, and reads in part:

  The earnings which are accumulated in the Party treasury and are not reflected in the financial reports can be used to purchase the shares of various companies, enterprises, and banks. On the one hand, this will create a stable source of revenue, irrespective of what may happen to the Party. On the other hand, these shares can be sold on the security exchanges at any time and the capital transferred to other spheres, allowing the Party to keep its participation anonymous and still retain control. . . . In order to avoid mistakes in the course of this operation during the “period of emergency,” it is essential to organize, both in the USSR and abroad, special rapid response groups, staffed by specially trained instructors from the “active reserve” of the KGB of the USSR, as well as by trusted individuals volunteering their cooperation and by individuals who, for one reason or another, have lost their job in the field units or administrative departments of the KGB of the USSR.28

  He later stated, “The reason for my transfer was the urgent need of the directors of the Administrative Department to create a division capable of coordinating the economic activity of the Party’s management structures in the changing climate. . . . The choice fell to me, since by education I am an international economist [and] I have experience working abroad.”29 Having been transferred to the Central Committee, Veselovskiy worked under the supervision of a small group that consisted of Ivashko; Nikolay Kruchina, the CPSU Central Committee chief of the Administrative Department; and KGB chairman Kryuchkov and his deputy director, Filipp Bobkov, who sent a directive to overseas residences that they should immediately submit proposals for the creation of covert KGB commercial firms and financial establishments.30

  Those in the International Department of the Central Committee and the First Chief Directorate of the KGB, dealing with foreign operations, already had a standard operating procedure for transferring secret funds abroad as a result of their support of foreign Communist parties. For example, General Nikolay Leonov, who was the deputy chief of the First Chief Directorate, had been in charge of money flows to Latin American countries (as well as having had contact with Che Guevara and interpreting for Khrushchev and Castro). He described the procedure in a subsequent interview: “Technically it was done in a very simple way. The Central Bank of the State of the Soviet Union handed the money directly to the Central Committee, to the International Relations Department which was responsible for relations with communist parties and national liberation movements. The money was physically taken to the Central Committee and as the final paragraph of these resolutions always said ‘. . . the KGB is entrusted with carrying out the decision,’ we received the order to collect the money, send it to the corresponding countries and deliver it to its destination.”31 The only thing that changed in 1991 was that the KGB and CPSU Central Committee were using this procedure to ensure their own future, not the future of some Latin American Communist party.

  Under the supervision of this group, Veselovskiy created a capitalist economy within the CPSU apparatus, establishing joint ventures and bank accounts abroad, both to make money and to hide money. According to a 1991 report, Veselovskiy, who “was assigned to manage Communist Party commercial affairs overseas, told his masters that he had found ways to funnel party money abroad. The stated goal: to ensure the financial well-being of party leaders after they lost power.”32 After the August coup Veselovskiy fled the country, first to Canada to link up with a Canadian subsidiary of a Swiss-based firm, Seabeco, and then to Zurich to begin a banking career at one of the very banks he had helped to establish.33 Kryuchkov was briefly jailed; Kruchina died during the coup after a fall from his apartment window;X and Ivashko was briefly general secretary of the CPSU during the August coup but retired in 1992 and died soon after.

  However, most of the KGB operatives who had been involved in forming cooperatives at home (many from the KGB’s Fifth Chief Directorate, headed by Filipp Bobkov, or the Sixth Chief Directorate, in charge of economic security and controlling the mafia) or joint ventures abroad (the function of the First Chief Directorate) formed the backbone of the new caste of KGB entrepreneurs who not only set up their own firms but provided security for emerging oligarchs, some of whose greatest profits came from this period. Bobkov, who joined the KGB during the reign of Lavrentiy Beria in the Stalin period, reportedly took about three hundred of the top operatives of the KGB Fifth Chief Directorate who were responsible for internal order to form the security services for Vladimir Gusinskiy’s Media-Most company. He also is reported to have taken many of the KGB’s personnel files with him.34

  Aleksey Kondaurov, also a general in the Fifth Chief Directorate, became the head of analysis for Bank Menatep, owned by the Russian oligarch Mikhayl Khodorkovskiy. He conceded that “leaders from all levels of power, from the party nomenklatura to the red directors, were looking for people who would help them deal with the new economic realities. . . . Khodorkovskiy and his group were these new young wolves.”35 Khodorkovskiy moved to establish links with the West, but those financial circles recall that when they first met him and his team, the Russians didn’t know how to use a credit card, they didn’t know how to write a check, and they didn’t have money enough to stay even in a hostel. They were quick learners, but as Anton Surikov, an independent security expert who had previously served in Soviet military intelligence and who knew Khodorkovskiy and those like him in the late 1980s, stated, “It was impossible to work in the black market without KGB connections and without protection from the KGB. Without them, no shadow business was possible. . . . The creation of the oligarchs was a revolution engineered by the KGB, but then they lost control.”36 As to whether Khodorkovskiy’s Bank Menatep was indeed one of the many vehicles used to launder CPSU money, as the legend goes, one of the five major initial shareholders, Mikhayl Brudno, who fled to Israel when Khodorkovskiy was arrested under Putin in 2003, simply said, “It can’t be ruled out that some companies that belonged somehow to the Communist Party were clients, but we were not able to identify them as such.”37

  Bobkov and Kondaurov were not the only Party or KGB officials who moved to take advantage of the new law on cooperatives and the easing of foreign trade regulations. In November 1991 the magazine Stolitsa reported that two-thirds of the employees of the nascent Russian stock exchange center were ex-KGB officials who were using their new position to launder KGB and CPSU money abroad.38 On June 24, 1992, Literaturnaya gazeta published excerpts from a telegram dated January 5, 1991 (No. 174033), which said that in December 1990 KGB chairman Vladimir Kryuchkov had authorized “provisional regulations of a secret operating structure within the organs of the KGB.” The purpose was to “provide reliable protection for leaders and the most valuable [KGB] operatives, in case the internal political situation develops along East German lines; obtain funding for the organization of underground work if ‘destructive elements’ come to power; and create conditions for the effective use of foreign and domestic agents during increased political instability.”39, XI Both General Oleg Kalugin, who had been head of Soviet counterintelligence until 1990, and the Russian journalist Yevgeniya Al’bats have underlined that the KGB really struggled to control the privatization process against the mafia on one side and the “destructive elements” (democrats) on the other.40 Kalugin subsequently stated that even before Gorbachev came to power, the KGB had placed its people in most Soviet banks abroad, in line with KGB chief Yuriy Andropov’s policy of maneuvering the KGB to promote economic reforms while controlling the process by greater political repression.41 Conveniently Kryuchkov’s own son was reported to be the KGB rezident (head of station) in Switzerland.42

  The Russian government lead procurator from the Procurator General’s Office, Sergey Aristov, respo
nsible for Criminal Case No. 18/6220–91, brought against those top officials who carried out the August 1991 coup, claimed that at the beginning of 1991 the CPSU Property Management Department alone had 7 billion rubles ($3.92 billion)XII in assets. By the autumn of that year, after the coup had failed and the investigation had begun, this 7 billion had largely been disbursed to commercial banks at home and abroad and to 516 businesses established using the Gorbachev-era law on cooperatives. Of these 516, the largest, according to Aristov, was a “loan” of 300 million rubles ($168 million) to a cooperative society of former KGB officers called Galaktika, or Galaxy.XIII, 43 CIA station chief Richard Palmer claims that Galaktika and other KGB-fronted firms received almost 1 billion rubles ($560 million) from Party funds.44 Further, Aristov claimed, more than ten commercial banks were established using 3 billion rubles ($1.68 billion) of Party money. He asked, “In the summer of 1991, a giant, finely tuned ‘invisible’ Party economy, corruptly involved to the necessary degree with the current government, went underground. . . . How much did they manage to hide?” Yel’tsin’s own press secretary, Pavel Voshchanov, similarly charged that the Communists had set up an “invisible party economy” that allowed them to hide money abroad. He also claimed that the Party had used Western credit to support “debt-ridden friendly companies” outside Russia rather than use the money for its intended purpose: to purchase food to prevent shortages during the coming winter.45 In another example, Aristov found that a cooperative venture called ANT, which was established by KGB officers reporting to the Council of Ministers and under the protection of Politburo member Yegor Ligachev, had received 30 billion rubles’ ($18.3 billion) worth of bartered materials from a French company in the first half of 1989 alone.46 The ANT cooperative was the subject of a four-part investigative series by Novaya gazeta in 2008 in which the authors concluded that the ANT deal was one in which, “long before the August coup, the security forces had set out to stop perestroika with tanks.” The investigation confirmed what was found in the 1992 investigations following the failed August coup: that the KGB had used various means to stymie the emerging democratic movement in Russia.47 Novaya gazeta concluded that ANT “employees,” who were in fact KGB officials, put modern battle tanks on flatbeds without proper authorization from the Ministry of Defense, labeled as “means of transportation unsorted.”48 At the last minute these cooperative workers were to be “caught” trying to illegally export the export-restricted tanks from the country, in this way giving conservative opponents to Gorbachev the ability to hold up these reforms and say, “Look. Admire—Gorbachev’s reforms will destroy Russia.”49 Anatoliy Sobchak, who spoke about the scandal in the Congress of People’s Deputies, accused ANT employees not only of planning to provoke a crisis with the “sale” of tanks but also of trying to organize the sale of rough-cut diamonds from the state and of trying to export strategic raw materials worth tens of billions of rubles.50 Sobchak’s intervention further bolstered his public persona as a leader of the democratic movement and someone ruthlessly opposed to such KGB tactics. It probably also alerted KGB officials that Sobchak was someone who would, in the future, need to be brought under control, which is where Putin would come in.