Putin’s Kleptocracy 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 1980s11 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

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, responsible 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.

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.”

III. By early 2010, the Spanish prosecutor had been reassigned and the investigation appears to have gone dormant.

IV. Joseph Serio, an American seconded to the Organized Crime Control Department of the Soviet Interior Ministry in 1990–91 who went on to head Kroll’s operations in Moscow, reached similar conclusions. On this subject and the global spread of Russian organized crime that occurred in parallel at this time, see Handelman (1995), Klebnikov (2000), Friedman (2002), Varese (2001), Gerber (2000), Williams (1997), and Shelly (2004).17

V. When the KGB was broken up after its involvement in the 1991 coup attempt against Gorbachev, several separate security institutions emerged with different functions: The Foreign Intelligence Service (Sluzhba Vneshney Razvedki, SVR) was formed out of the First Directorate of the KGB and was responsible for external intelligence. The Federal Agency of Government Communications and Information (Federal’noye Agentstvo Pravitel’stvennoy Svyazi i Informatsii, FAPSI) was made responsible for electronic surveillance. FAPSI was the rough equivalent to the National Security Agency in the United States. It existed until 2003, when Putin reunited it with the FSB. The Main Administration for the Protection of the Russian Federation (Glavnoye Upravleniye Okhrany, GUO) came out of the Ninth Directorate of the KGB. It was renamed the Federal Protective Service (Federal’naya Sluzhba Okhrany, FSO) in 1996. It is roughly equivalent to the U.S. Secret Service and is responsible for the protection of high-ranking officials, including the president. The Ministry of Security was formed out of the internal security functions of the KGB and was responsible for domestic and border security. It was reorganized in December 1993 into the Federal Counter-Intelligence Service (Federal’naya Sluzhba Kontrrazvedki, FSK). The FSK was then reorganized into the current-day Federal Security Service (FSB) in April 1995, and it was the FSB that Putin took over as director in 1998.

VI. Komitet vneshnikh svyazey—KVS, also sometimes referred to as the Committee on Foreign Economic Relations, or External Relations.

VII. According to the account provided by a Kryuchkov loyalist in the KGB, General Yuriy Drozdov, they also believed that the pro-perestroika leadership around Gorbachev had among them “agents of influence” from the CIA. Such was the certainty of their belief that subsequent to the collapse of the USSR, conservative “patriots” even instituted proceedings against the architect of perestroika, Aleksandr Yakovlev, on these charges.

VIII. The existence of this document became known when it was submitted by Richard Palmer, the former CIA station chief, as an appendix to his testimony before a U.S. House Banking Committee investigation into Russian money laundering. It was not included in the Fond 89 documents used in the trial of the CPSU, nor is there any indication of Gorbachev’s knowledge or complicity in the movement of these funds, although the fact that they were being moved by a small group of hard-line Party and KGB officials suggests their aim was to conceal what they hoped would be the death knell for the perestroika regime.

IX. Sometimes also referred to in English as the First Main (from the Russian glavnoye) Directorate. The terms used in the organizational charts provided by Andrew and Mitrokhin are used throughout this text.27

X. After the August 1991 coup failed, Kruchina was one of the officials who died, when he fell, jumped, or was pushed from a window. The extent of his efforts to move and hide CPSU money will never be fully known. Six weeks later his predecessor, Georgiy Pavlov, also fell to his death. In April 1991 Time magazine reported that Dmitriy Lisovolik had also leaped to his death, “after investigators found $600,000 in U.S. dollars in the office of Lisovolik’s boss, Valentin Falin, at Central Committee headquarters.” Veselovskiy named International Department deputy chief Karen Brutents as also having access to knowledge of the accounts, as well as three Politburo members, who were unnamed.

XI. When the article’s author, Mark Deych, drowned many years later, the “patriotic” blogosphere exploded with denunciations of his work particularly in the perestroika period. As one vile example, see “Mark Deych: Shit sinks,” at http://www.liveinternet.ru/users/prozorovsky/post218488816/.

XII. Annual average ruble-to-dollar exchange rates are used throughout, derived from Central Bank of Russia data.

XIII. General Leonov of the KGB stated that the free-for-all grabbing of CPSU properties began as early as August 23, 1991: “There was a massive seizure of party property: Office buildings, educational institutions, publishers, printing houses, holiday homes, villas and offices, etc.” Leonov (2002), p. 51.

XIV. Bonini and d’Avanzo have covered Russian politics and misdeeds as well as those of Western intelligence agencies, including the role of the Italian intelligence service SISMI in planting evidence they knew to be false of Saddam Hussein’s supposed efforts to obtain uranium to make nuclear bombs from Niger. The story is recounted in their 2007 book.53

X. For a very sympathetic account of the coup from the former KGB chief of its Analytical Department, see Leonov (2002).58

XVI. Ministry of Internal Affairs (Ministerstvo Vnutrennikh Del, MVD), which supervises all police, public order militias, and prisons.

XVII. The All-Union Leninist Communist League of Youth (Vsesoyuznyy Leninskiy Kommunisticheskiy Soyuz Molodyozhi, Komsomol) was an organization for those fourteen to twenty-eight. For a detailed analysis of the Komsomol roots of one such successful early entrepreneur, Mikhayl Khodorkovskiy, see Sakwa (2014).

XVIII. Major General Vyacheslav Shironin was once head of KGB counterintelligence. He also was involved in the massive KGB crackdown in Azerbaijan in the dying days of the USSR. He represented one of the main voices who supported the view that perestroika had itself been guided by Western intelligence agencies through “agents of influence” like Eduard Shevardnadze and Aleksandr Yakovlev.82