Putin's Kleptocracy_Who Owns Russia? Read online

  As for the money abroad, Procurator Aristov’s team received numerous reports of money flooding out of the country in advance of the August coup, including, for example, $70 million to Finland in one transfer alone. But his investigative efforts were hampered by the reluctance of foreign banks to provide account information without proof of a crime and the unwillingness of “certain circles” within the Russian government to allow investigators carte blanche.51

  Carlo Bonini and Giuseppe d’Avanzo, the two Italian reporters who later broke the Mabetex story revealing Yel’tsin’s corruption, reported that during this period KGB operatives in particular were working to keep the core of their institution together, since it constituted, in their opinion, the backbone of the entire country.52, XIV By their own accounts, top KGB officials felt that unless they coalesced around each other, the country would fall apart. General Leonov, who had been the deputy head of the KGB’s First Chief Directorate in charge of foreign operations, lamented in a 1998 interview that lack of leadership had doomed the USSR from the mid-1970s onward: “Brezhnev dies, and Andropov takes over, already sick. He is followed by Chernenko, also ill. Then Gorbachev takes office, but he is not a leader, and finally Yel’tsin, the destroyer. In other words, we did not have a leader of national stature.”54

  While some of these “state people” from the KGB, including Vladimir Putin, according to his own account,55 may have had a high opinion of Gorbachev’s plans to reform a system they certainly realized was moribund, their highest respect evidently went to Andropov, who as KGB chief and then as Leonid Brezhnev’s successor, had encouraged economic liberalization even as he cracked down on dissent. Now in 1990, with as many as 30 percent of those KGB employees stationed abroad, including Putin, they suddenly found themselves without a job and forced into the “active reserves,” waiting for their next assignment.

  A definition of the role, rights, and duties of those members of the active reserves was provided by Valery Shchukin, the deputy governor of Perm oblast’, one of Russia’s regions, in 2000, when Putin’s own status as a member of the active reserves in St. Petersburg also became known. To be a member of the active reserves “means that a person is not receiving a salary but continues to be on the staff list, has access to operational information, is eligible for promotion, and is obligated to carry out orders from superiors, including secret, confidential orders, without notifying his superiors at the place of civil service.”56 These were agents with knowledge of foreign languages and cultures and also black banking and black methods; it is not surprising that they sought to establish networks of mutual support.57

  Many members of the active reserves went into the private sector, setting up banks and security firms. Others, it would appear, formed the backbone of the coup attempt in August 1991. They did this less for their Communist ideals per se than for the Motherland, for the institution of Chekism (loyalty to the idea of an unbroken chain of security services, from Lenin’s Cheka through the KGB to Russia’s new FSB), and for themselves.XV As General Kalugin stated, “The KGB is the most stable part of the integrated structure. . . . The structure created to work under any conditions continues to work automatically. Although the processes of peeling away and disintegration are also at work there, for the KGB authorities it is a question of preserving not only the system itself, but themselves. It’s a question of self-defense and survival. The KGB will be one of those structures that will struggle until the end. And that’s the danger.”59 But when the August coup failed, the money stayed abroad, where the KGB had easy access to it. And because the CPSU was banned after the coup, the KGB alone now controlled it.60

  The KGB also established commercial banks in what would soon become the newly independent states of the former Soviet Union, as when a memo authorized Kruchina to transfer 100 million rubles ($56 million) to the new Kompartbank commercial bank in Kazakhstan, possibly with the idea that it would be easier to extract the money from Almaty than from Moscow if the regime collapsed.61

  Inside Russia, authorities were struggling to put goods in the stores in the absence of old administrative command mechanisms. Gavriil Popov, the mayor of Moscow, freely admitted that this was done by relying on the traditional “trade mafias,” which had previously worked for the Party but now started to function on their own. They came to be known mainly by their ethnic or by their district or regional affiliation—the Azeris, the Chechens, the Solntsevo group in Moscow, the Tambov group in St. Petersburg—and they seized the opportunity to use the new laws permitting commercial activity to legalize their actions and capture market share.62 But in the absence of the Party and with the collapse of the state, these groups had to provide their own security. Without state-backed law enforcement, violence became the means of enforcing contracts.63

  At the same time, the trade mafias came into conflict with Party and state officials who were themselves entering the private economy. A former chief procurator who was responsible for bringing dozens of top officials to court for corruption explained, “Former bureaucrats, those who used to run the administrative economic system, have poured into this milieu. They instantly used their connections, spreading metastases in this new fabric. They do everything in order to come more closely and definitively to property. Before, they possessed it indirectly, but now they have the opportunity to possess it directly.”64 The trade mafias that were not associated with or protected by former KGB or Party bureaucrats had to provide their own security. This intense competition between former officials and elements from the previous black market was a critical feature of Russian economic transition throughout the 1990s.

  Thus Gorbachev’s encouragement to form cooperatives and joint ventures inside the country, combined with the urgent establishment of off-the-books banking structures abroad, created a situation in which cooperatives legally funneled state funds into the private sector, and commercial banks were established abroad to receive these funds. The comparative advantage of being part of this early cohort cannot be overestimated. In a February 2000 interview with Boris Berezovskiy, one of the major oligarchs close to the Kremlin at that time, I asked whether the billions he was reported to have collected would withstand legal scrutiny, as some in Russia were demanding. His response was intriguing: “Absolutely. I would submit all of my wealth to legal scrutiny. Except for the first million.”65 The oligarchs depended on both the ex-KGB and organized crime groups to use targeted violence to control market entry, market share, and border control. The situation was the same in St. Petersburg, Putin’s home city. When the CPSU was legally banned after the August coup, the Leningrad (and then St. Petersburg) Association of Joint Ventures stepped in and took over its controlling shares in the newly formed Bank Rossiya. Thus the comparative economic advantage of these elites as the transition to democracy began.

  As I stated previously, after the collapse of the USSR and the failure of the August coup, the Yel’tsin government launched an urgent hunt for the CPSU’s money. They stood little chance of recovering the money; in fact much more started to flow abroad on the established financial pathways, sometimes, but not always, quite discreetly. The government and Parliament actively aided and abetted capital flight, as when, in February 1992, the Presidium of the Russian Parliament (under the Speaker Ruslan Khasbulatov) passed the resolution On Measures to Stabilize the Financial Situation of Foreign Banks Set Up with Capital of the Former USSR, authorizing the Central Bank to take over all the shares in Western banks set up with Soviet capital and to provide funds as required to stabilize those banks. (The Russian Parliament was able to order the printing of money until after 1993.) These included Moskovskiy Narodniy Bank in London, Donau Bank in Vienna, and branches of Vneshekonombank, among others.66 Among those involved in this effort were Aleksandr Medvedev and Andrey Akimov, both of whom were associated with the Donau (Danube) Bank, and both reputed to be KGB officers.67 Medvedev later became deputy chairman of the Management Committee and director general of Gazprom Export; a member of the Coordination
Committee of RosUkrEnergo, an intermediary company that bought gas from Gazprom and sold it after a price increase to Ukraine; and a member of the Shareholders’ Committee of Nord Stream, a joint-stock energy company. Akimov also became a member of RosUkrEnergo’s Coordination Committee and chairman of the board of Gazprombank.68 In 2005 VTB, Russia’s largest commercial bank, acquired Donau. By 2011 Akimov was a member of the board of Gazprom.

  As Procurator General Yuriy Skuratov was to reveal in 1999, in November 1990 the Paris branch of the Soviet State Bank (the predecessor to the Central Bank) had set up an offshore company called Financial Management Company Ltd. (FIMACO) based in the Channel Island of Jersey.69 According to a 1991 report, Leonid Veselovskiy, the former KGB colonel, had been assigned to funnel the CPSU money abroad.70 It was as if European Central Bankers, rather than trying to bolster and save the euro, decided to open dollar accounts in the Bahamas using EU funds. Over the next six years, according to documents provided to Newsweek and in congressional testimony by the former CIA station chief Richard Palmer, the Russian government moved billions of dollars into FIMACO, sometimes also moving the money back to Russia. It was essentially a slush fund for the Kremlin and was used for off-the-books political purposes, including Yel’tsin’s 1996 presidential campaign.71

  Simultaneously in the early 1990s, trading firms appeared that acted as intermediaries for selling Russian raw materials abroad, receiving materials at state-subsidized “internal prices” but selling them abroad at world market prices. The Russian Parliament established committees to document and stanch this unprecedented outflow of raw material wealth, reported to include “60 tons of gold, 8 of platinum, 150 of silver,” plus an unknown amount of oil, variously estimated between $15 billion and $50 billion.72 Some estimates were even starker: former prime minister Nikolay Ryzhkov claimed that the gold reserves in January 1990 were 784 tons, but by autumn of that year, Grigoriy Yavlinskiy, Gorbachev’s economic advisor, claimed that number had fallen to 240 tons. After the attempted coup, officials admitted, “A certain amount of gold is missing,”73 but they were unable to verify the exact amount.

  In investigating the loss, the Duma found that hundreds of KGB accounts had been established to transfer assets abroad, flowing from the Politburo decision referred to earlier.74 The Duma further concluded that at that time no company in partnership with the West would have been able to succeed without a deputy director or local manager from the security services.75 Certainly cooperatives that were established quickly came to rely on other cooperatives that were formed of former KGB or MVDXVI personnel who provided security.76 These new banks also relied on the knowledge of and connections to Russian and international organized crime,77 as well as former KGB operatives who had knowledge of foreign banking operations and rules. As this discussion has shown, it can generally be concluded that anyone who was establishing cooperatives and succeeding at it in the late Gorbachev period had either KGB or Komsomol cover or krysha.XVII

  The irony is not that KGB officials sought to become rich or to keep others from entering the market and gaining a foothold. The irony is that such officials sought to establish and maintain control of the process of privatization for the purpose of keeping unconnected and unauthorized people, whether mafia or democrat, from entering the market, in order to implement Andropov’s dream of establishing an economically freer but politically still controlled and conservative regime, like Pinochet’s Chile or post-Mao’s China. Gleb Pavlovskiy subsequently also concurred that he had been “one of them. My friends couldn’t accept what had happened. There were thousands of people like that in the elite, who were not communists—I was never a member of the communist party. They were people who just didn’t like how things had been done in 1991. By revanche I mean the resurrection of the great state. Not a totalitarian one, of course, but a state that could be respected. And the state of the 1990s was impossible to respect.”78 The writings of ex-KGB officers like Yuriy Drozdov and Nikolay Leonov bring home the same point: the West won the Cold War; the collapse of the USSR objectively deprived Russia of historic allies and strategic depth; and Yel’tsin almost brought about internal collapse. Only with the beginning of the Putin era were the conditions created for Russia to return to the global stage.79

  The Soviet dissident Lev Timofeev presciently argued more or less the same point, but from a different perspective, in the early 1990s: “The danger isn’t that yesterday’s district Party committee secretary will become a factory owner or a bank manager. Let him. The trouble is, rather, that this person is yesterday’s man, an unfree person linked to the conspiracy, bound hand and foot to his social class—that very apparat, military-industrial complex, and KGB. He is dependent on that trinity in everything he does, because he obtains his property rights from them for a price: a silent oath of loyalty. If he breaks that oath, he will not remain a property owner for long.”80

  Putin himself often harks back to the experience of being a KGB officer, when he was allowed more freedom of thought than others in Soviet society and was allowed to travel to Germany. One of the conclusions he reached from that experience was that it was obvious that a market economy could outperform a planned one. As he said in 2012, a planned economy “is less efficient than a market economy. History has staged two experiments that are very well known in the world: East Germany and West Germany, North Korea and South Korea.”81 But what kind of hybrid controlled-market regime can be established by KGB-trained cadres, who subsequently justified their moves by saying that they alone saw the writing on the wall in the late 1980s and, as Chief Kryuchkov of the KGB stated in a closed speech to the Supreme Soviet in June 1991, saw that Western intelligence services were using high-ranking politicians as “agents of influence” to bring about the collapse of the USSR?XVIII How better to safeguard the CPSU’s funding from Western plots than to bury it deep in secret accounts in Western banks? Rather than fight to keep the USSR going, risking a Yugoslav-style breakup, this group preferred to beat a strategic retreat, while keeping the hopes for revanche alive through the next generation of Chekists—including the FSB’s next generation coming of age with Vladimir Putin. In the meantime, if that doesn’t work out, perhaps they will all at least get rich. The deep history of this hope for political revanche and the money machine that runs it is the story of this book.

  * * *

  I. The Tambov and Malyshev groups had often been rivals but united forces in Spain. They had also sometimes united in St. Petersburg in fights against other outside rivals, including the Kazantsy from Tatarstan. For the best account of their early, and fluid, relationship, see Konstantinov (1995), 147–55.

  II. In a revealing 2011 article in Novaya gazeta4 that was translated and included in a U.S. government document released as part of Wikileaks, the author, Sergey Makarov, drew the following conclusions about Reznik and the way he did business as head of the Finance Committee based on an extensive survey of Moscow experts: “After United Russia started establishing its 70 per cent dictatorship in the State Duma in 2004, the deputies lost the opportunity to introduce amendments to the budget in the second reading (including in the interests of their own business); in the opinion of the experts, ‘Now in order to lobby for some line of the budget in the interests of their own business, a deputy must “win over” Reznik so that he will “drop off” the sum of the deputies’ “proposals” to the Ministry of Finance.’ ” As for what happens to these considerations once they arrive in the Ministry of Finance, where the budget is put together and disbursed, Makarov notably points out that while there were many in the Ministry who were seen as corrupt, its chief, Aleksey Kudrin, was generally seen as “not of this world”: “As compared with what he could get out of the budget inventories, he takes very little, and perhaps he does not take any at all. From that standpoint Kudrin in Putin’s eyes is the kind of ‘keeper of the treasury’ who opens it up only for Putin, while he sends other influential people away since one cannot lay away enough for everybody.”

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