While all of Moscow was gripped by the attack on Yukos in the summer of 2004, a series of transactions on the city’s stock exchange slipped by under the radar. Shares in Sogaz, a little-known insurance company belonging to Gazprom, had been sold in three tranches – first 49.9 per cent, then another 26 per cent and then another 12.[1] It seemed unremarkable at first. The shares, it turned out, had been acquired at a discount by three obscure companies connected to Bank Rossiya, the St Petersburg bank that was once a vehicle for Communist Party funds and then for Putin allies connected to the KGB.
The transactions had taken place quietly, far from the din of government discussions and edicts that would normally accompany such state-asset sales. For years the government had debated what to do with Sogaz and the other financial assets Gazprom had accumulated. But instead of an auction, a pumping and priming of assets by Western investment banks which Kasyanov and others in his government had discussed, the sale had taken place unheralded on the stock exchange. ‘The fact that Sogaz was sold so quickly and so cheaply was a new development,’ said Vladimir Milov, a former deputy energy minister in Kasyanov’s cabinet. ‘We’d never discussed this. Kasyanov’s firing opened the way for this kind of deal … There had never been the question it would be sold to allies. It was all so unexpected … But back then I didn’t understand the Sogaz sale was the beginning of a massive new process. It was just an insurance company, that’s all.’[2]
The Sogaz sale, it turned out, marked the beginning of a series of transactions, similarly unnoticed, that siphoned tens of billions of dollars in financial, industrial and media assets once held by Gazprom to Bank Rossiya, the stronghold of Yury Kovalchuk, the Putin ally from the St Petersburg days. It was the start of the formation of an obschak on a grand scale for Putin’s strategic – and personal – needs. It also heralded the rise of a new caste of oligarchs, all of them Putin’s KGB-connected associates from St Petersburg – and, in the case of Bank Rossiya’s main shareholders, most of them members of Putin’s Ozero dacha cooperative.
While Putin was squeezing the independence out of the Yeltsin-era oligarchs, jailing Khodorkovsky and threatening to eliminate the others as a class, Kovalchuk was at the centre of a group of loyal KGB allies rising fast to replace them in the second term of Putin’s presidency. At first quietly and then ever more noticeably, they began to benefit from insider deals. The transfers from Gazprom transformed Bank Rossiya, for instance, from a regional banking minnow few in Moscow had ever heard of into a new financial powerhouse with tentacles across Russia. Its assets mushroomed forty-fold after 2004, to reach $8.9 billion within eight years.[3] The transfers also led to the handover of control of the country’s third-biggest bank, Gazprombank, the Gazprom financial arm that held assets worth tens of billions of dollars, to Bank Rossiya.
None of the transfers would have happened had Putin’s men not taken over Gazprom at the start of his presidency. Ever since Putin made the replacement of its management with his own allies from St Petersburg one of his first priorities, its vast cash pools and financial assets had presented a wealth of opportunity for his inner circle. The asset sales would also never have gone through if the more liberal Yeltsin-era holdovers such as Kasyanov and Voloshin had remained in government. ‘Before, everyone had to agree,’ said Vladimir Milov. ‘But in Putin’s second term there was a very clear moment when the St Petersburg group took what the Moscow group hadn’t wanted to give.’ One by one, Putin’s men were being put in charge of swathes of the economy, while the siloviki were taking over the court system, the federal tax service and other branches of government previously out of reach to them.
It was part of a process that became known as ‘Kremlin Inc.’, whereby Putin in his second term appointed key loyalists in charge of strategic sectors of the economy. The process was most visible as he installed his closest KGB allies not only in charge of the state-controlled energy majors Gazprom and Rosneft, but of a host of state companies.[4] First there was Aeroflot, the airline that had once been the fiefdom of the Yeltsin Family. Viktor Ivanov, Putin’s KGB comrade from St Petersburg who now served as deputy head of the administration, was installed as its chairman at the end of 2004. Then there was Russian Railways, a vast empire of 1.3 million employees and revenues totalling nearly 2 per cent of Russia’s GDP, where Vladimir Yakunin, the bluff former senior KGB officer who’d been a leading Bank Rossiya shareholder and a member of the Ozero dacha cooperative, was appointed president in June 2005.
Andrei Akimov, the former Soviet state banker with ties to foreign intelligence, was repatriated from Vienna and promoted to oversee Gazprombank. Andrei Kostin, a former Soviet diplomat once based at the embassy in London, took over the reins at Vneshtorgbank, or VTB, the direct descendant of the Soviet bank of foreign trade. Putin appointed his closest colleague from the Dresden years, Sergei Chemezov, as head of the state arms export agency, Rosoboronexport, in 2004.
‘The people from the KGB and the financiers of the KGB are the ones who run the show now,’ said one leading participant in this process triumphantly. ‘Finally, they are taking over from the first layer of capitalism.’[5] ‘The 1990s oligarchs have ceased to be oligarchs and just become businessmen again. Now we have a Chekist oligarchy,’ said leading opposition politician Boris Nemtsov sardonically.[6]
But it was the shareholders of Bank Rossiya who were accumulating wealth most silently and rapidly. Among their number, for a time, was Gennady Timchenko, the low-profile alleged former KGB operative-turned-oil-trader who’d worked closely with Putin in St Petersburg. After Khodorkovsky was jailed and Sechin’s Rosneft began taking over Yukos, Timchenko focused more on his oil-trading operations. His latest venture, Gunvor, was sinking roots deep into Switzerland. Quietly, almost imperceptibly at first, it began picking up the barrels of oil once traded by Khodorkovsky’s Yukos.
The Bank Rossiya shareholders were the elite of Putin’s inner circle. And as the bank grew in size during the second term of Putin’s presidency, so did the residences of the shareholders. They moved en masse to a leafy island in the delta of St Petersburg’s Neva river that had once been home to the chancellors of the tsars.[7] The gated compound of palatial townhouses on Kamenny Ostrov, or Stone Island, was surrounded by an ornate moat, sweeping stone bridges and heavy security. The new inhabitants of the renovated compound, the financial courtiers behind the Putin regime, took on the mantle of modern-day noblemen. They would dress in tailcoats for secret parties at palatial estates, their wives and girlfriends in ballgowns from the era of Catherine the Great. The starlets hired to perform for them would not be told who their audience was, and would be paid in diamond rings, wristwatches and icons – anything valuable, as long as it didn’t leave any trace.[8]
More than any other, the story of the rapid expansion of Bank Rossiya in Putin’s second term casts light on the formation of a Kremlin obschak that could be used both for Putin’s personal needs and to bolster the rule of his KGB clan. As with the slush funds created in Liechtenstein and other havens for Putin and his St Petersburg allies in the early nineties, the lines between cash taken for strategic and personal needs were always blurred. The Sogaz share transfers, for instance, were the start of a process by means of which a vast national media empire was transferred into Kovalchuk’s loyal hands, helping cement the Kremlin’s strategic media monopoly. But they also allowed a palace fit for a tsar to be built for Putin on the Black Sea. Some of the hundreds of millions of dollars stashed in the network of companies behind Bank Rossiya appeared to lead directly to Putin. They were part of Putin’s personal wealth, according to a financier who worked on the schemes.[9]
The man who drew open the curtain on how the system worked was Sergei Kolesnikov, a member of the tight-knit circle of financiers closely involved in Bank Rossiya’s operations. He’d become increasingly concerned at how the bank’s precipitous growth was symptomatic of the increasing lack of checks and balances on Putin’s regime. ‘When Putin first came to power, I viewed his arrival with great gladness,’ he said. ‘We all connected it to the bringing of order to the country. In the first three years, I supported him and saw that everything he did was good, and even when he threw Khodorkovsky in jail I thought it was good. But then, after the second election in 2004, this understanding that he could rule forever began to appear … They’d taken control of the media and then business through the Khodorkovsky case. But then they cleared the political field. They cancelled the elections for governors and for the mayors in the biggest cities. This was the main task. There was no chance for independent people to appear and develop themselves.’[10]
It was a process, said Kolesnikov, shaking his head, that had left Putin ruling like a tsar, presiding over what was becoming a near-feudal economy. The Yeltsin-era oligarchs were cowed by Khodorkovsky’s trial, fearing that any one of them could face a similar fate. Kolesnikov saw that, instead of eliminating oligarchs as a class as Putin had pledged, the men behind Bank Rossiya had become part of a new oligarchy.
Kolesnikov himself had been one of their number. He knew intimately how the Putin system worked. He’d lived among the Bank Rossiya shareholders on Kamenny Ostrov. But he became ever more horrified as he observed the escalation in asset-siphoning from Gazprom: ‘As soon as you take control of financial resources, it is not possible to stop. This is a law of business.’[11] By the autumn of 2010, he was unable to bear it any longer. Taking only a small bag that contained, among other things, USB sticks with a trove of documents on all the transactions he’d conducted for Putin’s men, he slipped out of his townhouse on Kamenny Ostrov and hurried to the airport, where he bought a one-way ticket to Turkey, and then to the US. The documents he carried out with him were a roadmap of the creation of a presidential obschak.
The earnest and bespectacled Kolesnikov had started out as a physicist, working in Soviet times at a top-secret research institute developing medical and other devices.[12] The two men he was later to go into business with were involved in the same field. One of them was Dmitry Gorelov, then the chief KGB rezident in Denmark, with whom Putin had worked closely in Dresden, when Putin was involved in operations to smuggle technology through Western embargos.[13] The other was Nikolai Shamalov, the St Petersburg representative of the German technology giant Siemens, which had long been infiltrated by Soviet agents seeking to supply dual-use equipment to the KGB,[14] and another old friend of Putin’s. ‘It was clear that they had known each other since before the nineties,’ said Kolesnikov. ‘But to go into the history of these things was not correct.’[15]
Kolesnikov, Gorelov and Shamalov joined in business in the early nineties to form Petromed, a medical-supplies company that sold Siemens equipment to St Petersburg’s hospitals. They were among Putin’s closest friends, Shamalov in particular, who joined the Ozero dacha cooperative. Through their activities old KGB networks were being preserved. ‘Fragments of the system remained,’ said a former KGB officer who worked with Putin in St Petersburg. ‘Putin and his team were one of them.’[16]
When Putin took over the presidency, Petromed became a centre for collecting hundreds of millions of dollars in so-called donations, ostensibly to buy medical equipment from Siemens and General Electric to upgrade St Petersburg’s Military Medical Academy.[17] But the ‘donations’ were essentially tributes paid by oligarchs to the new Russian tsar, an entry ticket to Putin’s inner circle, and they became part of a slush fund for Putin’s rule. A large percentage of the money was used to fund Bank Rossiya’s rapid expansion. It provided the cash for Bank Rossiya to acquire Gazprom’s Sogaz insurance company – and for Gorelov and Shamalov to acquire stakes in Bank Rossiya. By that time Matthias Warnig, the former Stasi officer with whom Putin had also worked closely on technology transfers, had become chairman of Bank Rossiya. It was a sign that Putin’s former KGB networks were more than being preserved: they were being resurrected, and then provided with tens of billions of dollars of siphoned Gazprom cash.
The story Kolesnikov was to tell me, years later, when he emerged from it all, still wide-eyed at the secrets he was daring to reveal, described how he worked with Shamalov and Gorelov to funnel the Petromed ‘donations’ through a web of offshore companies that stretched from Liechtenstein to the British Virgin Islands to Panama. Thirty-five per cent of one such donation – of $203 million from the Yeltsin Family oligarch Roman Abramovich in July 2001 – was transferred to a BVI company, Rollins International, and $50 million of that then made its way to a Panamanian company called Santal Trading, which Kolesnikov liked to call the ‘safe’.[18] This was the cash store that funded the Bank Rossiya expansion, while Rollins International financed Gorelov and Shamalov’s acquisition of 12.6 per cent stakes apiece in Bank Rossiya on the eve of the bank’s rapid growth. First, said Kolesnikov, Rollins paid out $22.3 million and $21.8 million in dividends to Gorelov and Shamalov respectively, and they used the funds to acquire the stakes.[19] Then, in the summer of 2004, Santal quietly transferred $18 million and $41 million in loans and guarantees to two obscure companies – Aktsept and Abros – connected to Bank Rossiya, which used the cash to acquire 13.5 per cent and 51 per cent stakes in Sogaz respectively.[20] A further 12.5 per cent stake was acquired through another investment group, Lirus, which was run by Kolesnikov.
The amounts involved might seem small compared to the tens of billions of dollars now wielded by Putin’s circle. But those transfers were the first steps towards building a far greater pool of assets. The acquisition of Sogaz was the start of a remarkable process. Once it had been acquired by Putin’s men, its bottom line began to boom. The country’s biggest state companies were racing to join its client roster. It was no longer the insurance company of choice solely for Gazprom, but also for the Russian state railways monopoly and Rosneft. Adding to its weight as an outfit for the Putin clan, the son of Sergei Ivanov, Putin’s defence minister, another close ally from the St Petersburg KGB, was installed as head of the Sogaz board. As top-level clients streamed in, by 2006 its net profits had more than tripled. Then, with business booming, Sogaz was used as a springboard for a much bigger prize. In a series of deals in August 2006 it acquired a 75 per cent stake in the aptly named Leader Asset Management for an undisclosed sum.[21] This was the company that managed the assets of Gazprom’s vast pension fund, Gazfond, containing more than $6 billion (167.7 billion roubles), one of the country’s biggest pension pots as well as a 3 per cent stake in Gazprom, then worth $7.7 billion.[22] For good measure, Shamalov’s son Yury was appointed Gazfond’s head.
Once these pieces were in place, Gazfond was used for Bank Rossiya to take over a bigger target – Gazprom’s banking arm, Gazprombank, then the country’s third-largest bank and, most importantly, a vault in which Gazprom had parked tens of billions of dollars of its biggest assets. The deal, once again, happened under the radar, barely noticed. Instead of a cash auction with competing bids and Western investment banks, as Kasyanov’s government had once discussed, it was handed over in a simple asset swap towards the end of Putin’s second term.[23] Gazfond exchanged the stake it held in a Moscow electricity utility called Mosenergo, then worth $1.8 billion, for Gazprom’s controlling stake in Gazprombank, and then transferred this to Bank Rossiya’s Leader Asset Management, giving Bank Rossiya direct control of the country’s third-biggest bank with barely anyone noticing.[24] ‘Gazprom had given it all away for nothing, just like that,’ said Milov, the former deputy energy minister in Kasyanov’s cabinet.[25]
It was as if control of the country’s third-largest bank had been transferred through a set of Russian nesting dolls, or matryoshki, into Bank Rossiya’s hands. The deal was layered in complexity, as if to hide its ultimate results and to attract the minimum scrutiny. Gazprom later argued that the asset-swap deal had been in line with a market valuation given by Dresdner Bank. But Gazprom itself had valued Gazprombank at $8 billion just a few months after the $1.8 billion deal – a valuation that later nearly doubled as the bank’s profits continued to soar during Putin’s rule.
The deal had also seen Gazprom hand over tens of billions of dollars’ worth of industrial and media assets for nothing in return. First, there was the federal media empire Gazprom had accumulated, which included NTV, Gusinsky’s once fiercely independent television channel. A year before the asset swap was completed, Gazprom had sold its media assets to Gazprombank for $166 million. Barely two years later, once this media empire was firmly under Kovalchuk and Bank Rossiya’s control, Dmitry Medvedev, Putin’s chief of staff from St Petersburg, estimated the value of the same media assets at $7.5 billion, transforming Kovalchuk into the nation’s most important media tycoon,[26] at the head of the country’s biggest so-called ‘privately-held’ media conglomerate. The empire expanded to include the once Berezovsky-owned Channel One and two smaller channels, Ren TV and STS, as well as one of the country’s most respected newspapers, Izvestia, and its most widely-read tabloid, Komsomolskaya Pravda, and the radio station most beloved of the intelligentsia, Ekho Moskvy. Gradually, its operations became a crucial cog in the Kremlin propaganda machine.
Then there was Sibur, Russia’s biggest petrochemicals company, in which Gazprombank held a 75 per cent stake, while Gazfond held the remaining 25 per cent. The year after Gazprombank was transferred to the control of Bank Rossiya for $1.8 billion, Sibur was valued at $4–5 billion: its revenues totalled $6 billion, its operating profits were $1.2 billion. Yet its transfer to Bank Rossiya went unnoticed and unremarked. In 2011 Gazprombank would flip Sibur to two businessmen close to Putin, Timchenko and Leonid Mikhelson, for an undisclosed price. At the same time, Gazprombank said it valued the company at $7.4 billion.
The share shuffling had stealthily drained as much as $60 billion in assets from state-controlled Gazprom into Bank Rossiya’s hands, according to an estimate by Vladimir Milov, some of which had then been handed to Putin’s closest cronies.[27] Yet none of this had faced any independent oversight from government, shareholders or parliament. Gazprom was meant to be the Russian state’s largest and most important company, its biggest generator of revenues, yet its carve-up had taken place without discussion, behind closed doors. ‘This was a total giveaway of all the financial and other assets. And Gazprom got nothing. It’s a fantastic tale,’ said Milov.[28]
Milov, then in his early thirties, with thick dark hair and a frank, inquisitive air, had been one of the brightest young officials in the Putin government during his first term. But he left after less than a year, disappointed by the lack of reforms to break up monopolies like Gazprom, and became one of the rare voices criticising government policy. Having set up an independent think tank commenting on government energy policy, he gained a reputation as an astute, liberal-minded expert. In 2008, as Putin’s government began more and more to resemble a kleptocracy, Milov joined the liberal opposition movement led by former deputy prime minister Boris Nemtsov. He co-authored a series of reports that delved into the failings of the Putin regime, including one he wrote himself on the asset-siphoning from Gazprom called ‘Putin and Gazprom’.
In those days, Milov was a lone brave voice pointing out the scale of the asset-draining. As Putin’s men increasingly dominated all levers of power, few investment banks or investors investigated the transfers. When we spoke, Milov would often mention the irony of how Putin’s men claimed to have taken over Gazprom in an attempt to root out asset-siphoning by its Yeltsin-era executives, making it even more cynical that the asset-siphoning took on an even grander scale once Putin took control of the gas giant. ‘The previous Gazprom management were doling out assets that they had some reason to do,’ said Milov. ‘They gave to others at a discount price the assets that Gazprom was not capable of developing itself. But when Putin’s men were in charge they just gave away assets for no reason, almost for free.’[29]
After Sergei Kolesnikov fled to the West, he joined in explaining that there was a simple reason for that. Putin had made Gazprom his personal fiefdom, his property to direct both as a geopolitical instrument to project Kremlin power, and as a source of cash for his circle. ‘Do you know who the real owner of Gazprom is?’ Kolesnikov asked me. ‘The one who tells its CEO Alexei Miller what to do, who tells him whom to give what contract to and at what price, what price to work with Sogaz at, who to sell it to, and who to sell Gazprombank to? This is all Putin’s.’[30]
Kolesnikov was privy to highly sensitive information. He understood exactly how the slush fund system worked, and beyond the asset-siphoning from Gazprom, what disturbed him most of all was how more and more of the cash in the network he oversaw began to be diverted for Putin’s own personal comfort. One of the funds Kolesnikov ran was intended to funnel part of the ‘donation’ cash into investments in the real Russian economy, including St Petersburg shipyards. In the beginning, this had made some of the donation-siphoning palatable for Kolesnikov – at least some of the wealth was being distributed into creating jobs and growing the economy. Another part, however, was to be spent on the building of an opulent palace for the president on the Black Sea coast. The project had originally been intended as a comparatively modest thousand-square-metre house. But it snowballed into a four-thousand-square metre Italian-style palace with three helipads, a summer amphitheatre, a marina and a teahouse with swimming pools, at a cost of $1 billion.[31] When, after the 2008 financial crisis Putin issued instructions that all the remaining funds in the Petromed slush fund should be spent on his palace instead of on the shipyards and other projects in the real economy, Kolesnikov began making plans for an exit. ‘It turned out that I’d been working every day for fifteen years for ten hours a day to build a palace for the tsar,’ he said. ‘I could never be in agreement with this. But when I objected they told me, “Who are you speaking against? You are going against the tsar.”’[32]
The diversion of the funds for the president’s palace was the clearest sign that the network of companies Kolesnikov had helped oversee was closely linked to Putin’s personal fortune – that this was a slush fund that could be dipped into for his own use. Kolesnikov alleged that it was Shamalov, Putin’s closest friend, whom Putin personally instructed to spend increasing amounts on the palace instead of on the investments in the real economy. Indeed, it was through a company belonging to Shamalov that the palace was owned.[33] ‘Shamalov represented Putin,’ said one insider.[34] ‘He was the one who got the orders on where the money was to go.’ The activity raised an interesting question. If Shamalov was representing Putin’s interests in the building of the palace, did his shareholding in Bank Rossiya also represent Putin’s personal interest? Shamalov declined to comment. But when Kolesnikov emerged to tell his story, Dmitry Peskov, Putin’s spokesperson, derided any such claims as ‘nonsense’: ‘Putin never had and does not have any connection to Bank Rossiya, nor to any transactions or deals through any of the offshore companies or companies that are mentioned. He has no connection to the growth of the bank.’[35]
If it hadn’t been for the funds being spent on Putin’s personal comfort, any link to his own interests would have been impossible to trace. ‘There are no documents or papers showing Putin’s ownership’ of anything, said Kolesnikov.[36] ‘Putin was a person who was taught specially not to leave any trace.’ Those who handled the Bank Rossiya network had also been instructed to conduct their affairs in secrecy. When they met to discuss business, they invented a system of nicknames so that – in case of eavesdropping – no one would know who they were talking about. Putin was ‘Mikhail Ivanovich’ – the name of an omniscient police chief in a classic Soviet comedy film.[37] Kovalchuk was strangely named ‘Kosoi’, or cross-eyed. ‘When they decided to give everyone a nickname he had a sore eye, and therefore they decided to call him this,’ said Kolesnikov.[38] Shamalov chose ‘Professor’, after the character who experiments on a stray dog in Mikhail Bulgakov’s satirical novel on the state of Soviet man, Heart of a Dog. Gazprom’s Alexei Miller, meanwhile, was ‘Soldat’, or soldier, a nod to his standing as a loyal yes-man who followed orders. Putin’s close ally Timchenko became ‘Gangrena’, or gangrene, because at the time his oil-trading business was developing so fast.[39]
When Kolesnikov fled overseas, he took with him not only documents on transactions, but also tapes of conversations between members of this group. One of them appeared to be of a meeting he’d had with Shamalov in St Petersburg. In it, they tot up whose cash is whose in the stash they manage in Rollins International, the BVI part of the Petromed network. ‘The money of Mikhail Ivanovich is $439 million. This is Mikhail Ivanovich’s money,’ Kolesnikov says.[40]
What was being created was an elaborate system of fronts that could act on behalf of Putin and his regime of komitetchiki. If the Yeltsin-era tycoons had sought to manipulate a weakened Kremlin into parcelling out assets at a discount price, Putin was creating a loyal network of trusted, KGB-connected custodians. This process was extending westwards into Europe, into Liechtenstein and Monaco, and then to Panama and the BVI. Timchenko had long moved from his St Petersburg base and was sinking roots deep into Geneva. Surrounded by the snowcapped Alps and the Jura mountains, the city had long been a natural destination for Russian money. Part of a neutral buffer zone between East and West since the end of the Second World War, the financial secrets of the world’s great powers were securely buried within its walls. ‘It was a haven for both blocs,’ said a former KGB officer who operated there.[41] ‘It’s like a restaurant in the middle, between Chinatown and Little Italy, where the two mob bosses can go and eat and discuss business. It’s the most secure restaurant in the world.’ KGB money had long been stashed in the city’s vaults: bankers would whisper stories of how, in the days of the Cold War, Soviet businessmen carrying suitcases stuffed full of cash would call them from telephone boxes.[42] Those were days of numbered accounts, of code words and business conducted on a nod and a wink. Now, with the Cold War long pronounced over, Geneva was once again becoming an important outpost for the oil wealth commanded by Putin’s KGB men.
From a prime spot overlooking Lake Geneva, Timchenko’s oil-trading company Gunvor became the most immediate beneficiary of the Kremlin takeover of Yukos. For a time, its rise was one of the industry’s great mysteries. At first, few noticed when, after Sechin’s Rosneft acquired Yugankneftegaz, the new state oil champion began redirecting the bulk of its exports through Gunvor. Then, when state-controlled Gazprom took its own chunk of the oil industry, acquiring Roman Abramovich’s Sibneft in 2005, its oil arm Gazpromneft also began awarding large contracts to Gunvor. Cowed by the Kremlin’s growing might, other oil majors, anxious to curry favour, followed suit. Within four years Gunvor was trading 30 per cent of all seaborne exports from Russia.[43] Its rise had been so meteoric that it could no longer be hidden from view: by 2008 it had become the world’s third-biggest oil trader, with revenues of $70 billion.
One by one, the other independent Russian oil traders that flourished in Geneva in the Yeltsin years had shut up shop. When Yukos had sold oil through its Geneva-based Petroval, the billions of dollars it netted from the difference between the domestic and global oil prices had been a big issue for the Putin regime. But now that the oil flows had been redirected through a trader owned by one of Putin’s closest allies, the concern seemed to die away. Bereft of oil, Petroval, which had been based just around the corner from Gunvor, on Geneva’s central rue du Rhône, was forced to close down.[44] Gunvor ‘took over all our barrels’, said one former Petroval trader.[45]
Putin’s government seemed to have clamped down on the worst excesses of the so-called transfer-pricing trading schemes of the nineties, by which commodities were sold through middlemen and traders at lower domestic prices, netting the difference from the global price. But Gunvor never disclosed its profits, and for a long time both it and Rosneft, its main supplier, Gunvor avoided any scrutiny. Before late 2007, Rosneft didn’t sell any of its crude exports to traders through an open tender system. In the beginning ‘the margins were unbelievable’, said one person involved in Gunvor’s trading operations.[46] Timchenko, through his lawyers, said all contracts with Rosneft were awarded entirely on merit, reflecting Gunvor’s ‘market leading status and depth of expertise and experience’.
For a time, part of Gunvor’s ownership seemed as much of a mystery as its finances. On paper it was owned by Timchenko and his Swedish business partner Torbjorn Tornqvist, but also by a third shareholder whose name, the oil trader said, could not be revealed.[47] Of all Putin’s close KGB cohorts who were now rising in business, Timchenko had kept the lowest profile. He operated in a world shrouded in secrecy, shuttling between Moscow and Switzerland, where he lived anonymously in a mansion surrounded by manicured gardens and a high guarded fence in the salubrious suburb of Cologny, overlooking Lake Geneva. The business he handled was so sensitive that he never used email.[48] If he spoke by mobile phone, he did so in the full awareness that he was being listened to.[49] He’d never given an interview until 2008, when Gunvor’s meteoric rise forced him into the light.[50] At that point only one photograph of him had ever been seen.
In the early days Timchenko was kept almost invisible even to those closest to Putin. Sergei Pugachev often spent time with the likes of Yury Kovalchuk, but he’d seen Timchenko only once. ‘Putin had always hidden him from me,’ he said.[51] One wintry evening he’d arrived at Putin’s Novo-Ogarevo residence outside Moscow to find Timchenko in the kitchen. Putin had immediately ordered Timchenko to wait outside in the snow while they discussed business. It was as if he was trying to demonstrate to Pugachev that he wasn’t important to him. But to Pugachev, it revealed the sensitivity of the relationship between the two men.
The reason for the apparent secrecy became clear to Pugachev when a banker flew in to see him from Switzerland towards the end of 2003. The banker asked him about Timchenko, and said he’d been told that he was a holder of funds for the president: ‘He told me, “There’s a guy named Timchenko, and he’s brought us a huge amount of money.” He told me all this money is Putin’s,’ Pugachev said.[52]
*
Ever since Gunvor’s rise began attracting speculation about financial ties to Putin, Timchenko had always strongly denied that the company’s success had anything to do with the president, insisting it was down to his own business savvy. After the well-connected political analyst Stanislav Belkovsky dared, towards the end of Putin’s second term, to publicly claim that Putin was an ultimate beneficiary of Gunvor,[53] Putin swatted the allegations away with more than his usual disdain. They were nonsense, he told reporters, ‘picked out of someone’s nose and smeared on bits of paper’.[54]
But for Pugachev the sensitivity and secrecy surrounding Timchenko could only mean one thing: more than anyone else in Putin’s inner circle, at the beginning of Putin’s presidency he was the first business ally to hold funds for him. This, he said, must have been why Putin seemed shocked when Pugachev asked him about Timchenko after he’d visited Berezovsky, by then in exile in London, and told him his arch-rival was threatening to unleash a scandal involving Timchenko. ‘He went absolutely white,’ said Pugachev. ‘He shut the conversation down immediately. He didn’t even ask what the scandal would be.’[55]
For two of Timchenko’s former KGB associates and two close Putin allies, the root of Gunvor’s success could only lie in financial connections with the Russian president. ‘Putin’s money, of course it’s there,’ said one of them. ‘How else do you think Timchenko became such a billionaire?’[56] ‘When Gunvor was created it was 100 per cent Putin’s company,’ said a Russian tycoon close to Putin.[57] ‘Timchenko is just the holder of a purse which has $10 billion in its account. He might differ over how much of it is his and how much of it is Putin’s. But really it is all the same.’ Later, the US Treasury Department flatly said that ‘Putin has investments in Gunvor and may have access to Gunvor funds.’[58]
Timchenko has repeatedly denied any connection between Gunvor and Putin and called the sanctions no more than an attempt to put pressure on the Russian regime. But in Geneva, a network of money men, some of whom worked with Timchenko, also laid a trail of connections to the Russian president. They also offered an indication of a greater strategic aim. Among them were descendants of White Russian aristocrats who’d fled in the wake of the Bolshevik Revolution, who dreamed of restoring Russia’s empire and had long had ties with the KGB. Almost by definition, they supported the restoration of Russia’s imperial might, and as Putin’s men took control over the economy, they backed him every step of the way.
One of them was a banker whose appointment as head of Russian private banking at HSBC in Geneva in 2007 was closely followed by the arrival of Timchenko and his daughter as its clients.[59] The banker, Jean Goutchkov, had worked closely with Timchenko at a succession of top private banks in Geneva, according to two people familiar with the situation.[60] (Timchenko, through his lawyers, said he knew Goutchkov but had no business relationship with him. He repeated there was no connection to Putin.)
Goutchkov was the grandson of a White Russian aristocrat who’d served as chairman of one of the first Dumas, and had been a leader of the Octobrist movement that desperately pushed for reforms of the constitutional monarchy before the Bolsheviks swept to power.[61] Goutchkov maintained the stately presence of his illustrious ancestor. He kept his hair swept back over a high forehead, his eyes were cold and blue. For years he’d worked closely with the Putin regime, sweeping in and out of Moscow in style, cultivating wealthy Russian clients as he worked first for Intermaritime Bank of New York, then for Julius Baer and then HSBC. But for most of his colleagues in Moscow, his movements were a mystery. ‘He would never tell you when he was in Moscow, and he would never tell you who he was meeting with,’ said a former asssociate at HSBC.[62] ‘He would arrive and leave without leaving a trace.’ Those who know him say the secrecy was well-founded. ‘This guy is at the nerve centre of Russian power,’ said one of his Geneva associates.[63]
In the 1990s Goutchkov played a key role in introducing Timchenko to his Swedish business partner Torbjorn Tornqvist, according to two of his Geneva associates.[64] Back then Goutchkov and Tornqvist had worked in the business empire of a controversial Swiss financier, Bruce Rappaport, who’d long been dealing with the Soviets – Goutchkov at his Intermaritime Bank, and Tornqvist at his Petrotrade oil trader.[65] (Timchenko has claimed his meeting with Tornqvist came several years later, when the Swede was working at a trading outfit in Estonia.) Goutchkov denied ever knowing Putin. But three of his associates said that after Putin became president, Goutchkov had grown close to him.[66] When Goutchkov’s wife died in 2010, he travelled with Putin and Timchenko to an ancient monastery on Lake Ladoga, near the border with Finland, a spot long revered by Russian Orthodox believers,[67] one of these close associates said, and he would return there with them two or three times afterwards. In thanks for his services, Putin had given Goutchkov a Russian passport, two people close to him said.[68] When one of Goutchkov’s Geneva associates was asked if Goutchkov’s friendship with Putin extended to providing him with financial services, he offered a tightlipped reply: ‘It is much more of a friendship. But it is strategic. If Putin wants anything, Goutchkov can do it.’[69]
The proximity of Goutchkov was an indication that, as with Kovalchuk and Bank Rossiya, Timchenko’s rise was about a lot more than the president’s personal finances. It was about creating a slush fund for Putin’s KGB clan, aimed at preserving and projecting their power. Timchenko and Goutchkov appeared to be part of a strategic network that, like the underground KGB financial networks that had promoted Communist Party interests during Soviet times, would manage and disburse cash for the strategic needs of the Putin regime. ‘Of course, in Timchenko’s activities there are some interests of Putin,’ said a former senior KGB officer, an associate of the Geneva money men.[70] ‘But this is not necessarily in the form of some personal money. This can be black cash for funding party activities or a charity fund that can influence the electoral situation. It can be strategic resources.’ ‘Timchenko implements what is necessary to implement,’ said a close Putin former KGB ally. ‘He is a source of resources for the realisation of a certain policy for certain interests.’[71] Two senior US officials said they shared this view.[72]
It was a way of operating that was integral to the KGB – as if it didn’t know how to survive without the non-transparent financial networks it had deployed in Soviet times to smuggle embargoed technology, to fund the influence campaigns of the Communist Party and clandestine operations abroad. Putin’s people were replicating the KGB-run systems of the past, in which oil exports had been a key source of black cash. Russia had shed the rules of the command economy, and become a full-blown participant in the global market economy. But now that Putin and his KGB men had taken power, they were transforming the way Russia interacted with it, exercising a form of state capitalism under which, just as the KGB memos for the transition to the market had recommended so long before, trusted custodians like Timchenko acted on behalf of the regime. They were extensions of the Kremlin, not independent companies that only followed the maxims of self-interest inherent to standard Western economies.
The KGB blueprint had called for companies to be established abroad to ‘take part in all forms of information and intermediary activity: traders, brokerages, service companies and representative offices’, of which ‘the shareholders would be the trusted custodians’. Most particularly, the memos had indicated that such operations be based ‘in one of the capitalist countries with a mild tax regime like Switzerland’.[73]
For Putin’s men, it was only logical that the country’s biggest and most strategic cash flow, from the oil trade, should be put in the hands of a close ally. In their view, the political challenge they believed Khodorkovsky had posed demonstrated the need for this. ‘You could say all [Gunvor’s] money is Putin’s,’ said Andrei Pannikov, the former KGB officer who was one of Timchenko’s first partners in the oil trade. ‘But it is much more complicated than that: if the market is in loyal hands, then this means control over prices. And it also means the profits do not go towards financing terrorism.’[74] Pannikov was a pioneer in operating through the Western financial system.[75] In the eighties he’d studied offshore finance at the Soviet Academy for Foreign Trade just as the KGB began preparations for a new phase in its struggle against the West.
The off-book system originally proposed by the KGB appeared to be being put into operation under Putin, and it bypassed the usual systems of modern-day state accounting such as a federal budget, in which spending on intelligence, elections, the legal system and politics is approved by parliament. Instead, vast slush funds were being created, where the lack of any transparency or accountability suited a regime intent on authoritarian rule and on restoring Russia’s geopolitical might.
Jean Goutchkov grew up in a tight-knit White Russian community in Paris alongside another member of the Geneva group of money men. Serge de Pahlen, a tall, stooping man with thick commanding eyebrows and a lofty forehead, had long been close to Putin.[76] ‘De Pahlen is one of the closest friends of Putin. He is from one of the noblest families of Russia,’ said a Geneva associate.[77]
When Goutchkov’s grandfather settled in Paris after joining the hundreds of thousands fleeing the 1917 Bolshevik Revolution,[78] his family and de Pahlen’s had lived as part of a close diaspora bound by grief at losing their empire, and by their devotion to Russian culture and the Orthodox Church. For the most part, the White Russians in Paris lived very modestly: the city was filled with tales of grand dukes and princes driving taxis or waiting on tables. It was a community that was always riven by intrigue, double agents and plots. While many continued to rail against the Bolsheviks, and attempted to organise opposition cells from abroad, others had taken to informing on their compatriots. The Soviet secret services had long sought to infiltrate the White Russian diaspora – firstly to penetrate the opposition movements, and then to recruit agents to further their own power. For those they recruited, it was a source of much-needed cash, and for some, a window to a Russian empire they still believed in, no matter who had taken the reins of power.
According to a former senior Russian foreign-intelligence officer, Serge de Pahlen and Alexander Trubetskoy, the son of a White Russian prince, were among the imperial believers recruited by the KGB in the eighties.[79] They became been part of a network run by Igor Shchegolev, later Putin’s communications minister, who at the time served undercover for the KGB as Paris correspondent of the Soviet state news agency TASS.[80] At a time when the smuggling of embargoed technology was at its height, Trubetskoy worked at Thomson, a semiconductor and microelectronics firm that had long been infiltrated by Soviet agents. De Pahlen, meanwhile, shuttled between Paris and Moscow for a French company supplying Soviet oil refineries with equipment, part of the network of friendly firms that appeared to help fund Soviet influence operations. In 1981 he made an invaluable connection when he married Margherita Agnelli, daughter of the head of the Fiat family,[81] and was promptly made Fiat’s vice president for international relations. From there, he continued to pay frequent visits to Moscow, hobnobbing with Party bigwigs and foreign bankers supporting the Soviet regime.[82] Fiat had always been a key Soviet partner, and according to two former KGB intermediaries it became a supplier of dual-use technology through a myriad of friendly firms.[83] Meanwhile, Goutchkov was working in Moscow, overseeing a group of French banks providing financing for the Soviet oil industry.[84] The two men were part of a network of operatives assisting the Soviet regime.
De Pahlen first met Vladimir Putin in November 1991, when Putin was St Petersburg’s deputy mayor and de Pahlen helped organise the return of the last heir of the tsars, the Grand Duke Vladimir, to Russia.[85] He already knew St Petersburg’s mayor Anatoly Sobchak through the White Russian community in Paris, and he and Putin struck an immediate rapport. De Pahlen ‘picked out Putin’, said another member of this imperial-minded group, Konstantin Malofeyev: ‘He said, “This guy thinks like us.”’[86] Neither of the two could think of Russia as anything other than a great power. They were both shocked by the collapse of the country, and the chaos that was unfurling after the failed August coup. They kept in close contact: whenever Putin was in Paris he would visit de Pahlen, and Sobchak and his family remained close to him too.
When Putin became president, de Pahlen immediately gave him his support. On the eve of his first meeting with his French counterpart Jacques Chirac, Putin turned to de Pahlen for advice.[87] They dined together in a private room in a Paris restaurant, where de Pahlen told him he should rule for thirty years, as long as Catherine the Great. It was the only way to restore order, he told him. It was the only way to restore Russia as a global power.
Goutchkov and de Pahlen were leading members of a network of White Russian descendants who helped propel Putin on a mission to restore Russia’s global position following the Soviet collapse. Putin had drawn on the writings and philosophies of exiled White Russians who’d written of the country’s unique path as a Eurasian empire, its destiny as a counter to the West, as he sought to forge a new Russian identity and build bridges with the pre-Revolutionary imperial past. Their words seemed to make a deep impression on him, and Goutchkov and de Pahlen supported him wholeheartedly as he sought to curb the power of the Yeltsin-era oligarchs after taking the presidency. They approved the emphasis on building a new system of Kremlin loyalists. ‘When you are in strategic sectors you are part of the state,’ said one of the Geneva associates. ‘Oil, gas, telecoms – by definition these are strategic sectors. If you are in this sector, you serve. You are not independent from the state.’[88]
Putin ‘had a sacred mission to save the country’, one person close to Goutchkov said.[89] For de Pahlen, when we met in his book-strewn Geneva office, Putin was key to Russia’s revival: ‘He stopped the disintegration of the country and started the restoration of a new Russia. It’s very important for America, which doesn’t want a multipolar world. They don’t want a strong Russia.’[90] The privatisations of the nineties, he said, were ‘barbaric’.
Goutchkov and de Pahlen didn’t seem to particularly care that Putin’s KGB men were engaging in their own barbaric methods, trampling on legal rights as they asserted control over the economy. They told themselves the Kremlin subversion of the legal system was part of a historic mission to restore Russian power as a counter to the West. ‘Everyone was stealing,’ said one of their Geneva associates. ‘But then Putin came and said, “Enough is enough. Now it is the time when Russia is a great power of the twenty-first century … You received a lot from Russia’s resources. Now it is time you should give back.” I understand that from the point of view of the rule of law maybe it should have been done differently. But Putin didn’t have time. He had to take short cuts. Maybe Khodorkovsky suffered, but Putin had to do what he had to do … Patriotism is more important.’[91]
They didn’t seem to particularly care either that Putin’s KGB men were stealing – and in ever greater quantities as oil prices began to soar. The most important thing was reasserting the power of the Kremlin. It didn’t matter how they got there. ‘Money and power have gone together since the time of the ancient pharaohs,’ said the Geneva associate. ‘There has always been a higher sphere where money and power meet. The people in Russia are not stupid. Of course Putin has some personal interests. But the important thing is there is no other leader so popular. The normal population wants to have a fridge, a TV, a house, children, a car. For the rest, more or less, you don’t care, as long as your material situation isn’t impacted.’ The aim was to restore Russia’s position as a geopolitical power: ‘What we have seen over the last twenty to thirty years with the arrival of Gorbachev, it was a moment of temporary weakness. Like any big power might have … Now that the economy is being restored, Putin wants to take back the sphere of interests.’[92] Another KGB associate of the Geneva money men railed against the undue influence he believed the US had wielded over Germany ever since the end of the Second World War, and spoke of one day breaking that.
But at the beginning these were goals they could only dream of, and in Putin’s second term there was still a long way to go. Efforts to restore Russian influence were to begin, first of all, a lot closer to home.
*
It was November 2005, about a year since the Orange Revolution had sent Ukraine spinning out of Russia’s orbit into the arms of the West, and Oleh Rybachuk, Ukrainian president Viktor Yushchenko’s chief of staff, was nervously heading to Moscow.[93] The purpose of his visit was to hold talks on a new agreement on the supply of gas from Russia to Ukraine, and the signs were not good. Ukraine depended on Russia for most of its gas, and its economy was already starting to slow. Ever since the summer, Kremlin officials had been warning that they would impose a significant hike in prices, and now that the pro-Western Yushchenko was installed, they made it clear they did not want to effectively subsidise the Ukrainian economy, especially since, they claimed, the country’s leaders ‘receive salaries from the Americans either directly or covertly’.[94]
Gazprom’s position at the centre of the gas trade between the former Soviet republics, with its enormous gas reserves and its extensive pipeline network traversing Russia, had long made it a key lever of Russian influence over its near neighbours. While the Central Asian republics had gas reserves of their own, Georgia, Belarus and Ukraine were dependent on supplies from Gazprom and companies connected to it. For the most part Gazprom had doled out gas at heavily discounted prices, just as it had when they were part of the Soviet empire. Ukraine, above all, stood out as a vital transit corridor for Russian gas to Europe, where it supplied 25 per cent of the continent’s needs. But now that its leadership had taken a Westward tilt, the Kremlin indicated that it intended to put an end to any more subsidies.
When Rybachuk reached the Kremlin, Putin made his intentions clear. Russia wanted to substantially hike prices, and Ukraine would have to agree to ‘certain conditions’, otherwise the gas would be cut off.[95] But in a subsequent meeting, Dmitry Medvedev, then the Kremlin’s chief of staff and chairman of Gazprom’s board, opened the window for a compromise deal. If Ukraine agreed to purchase more gas through a certain trader of the Kremlin’s choice, instead of from Gazprom, then the overall price could remain cheap. Medvedev said he could go into more detail once Rybachuk had secured Yushchenko’s full agreement, but as a taster he told him such a deal would earn each side $500 million a quarter – or $2 billion a year, while ensuring a continued cheap supply of gas. ‘He told me this is the share that would be ours – meaning the Ukrainian government,’ said Rybachuk.[96]
Rybachuk could scarcely believe his ears. What he was being offered sounded like a kickback scheme: ‘It was a deal to corrupt the whole government.’ The gas trader on which Medvedev and the Kremlin was insisting on as a middleman was named Rosukrenergo, and its ownership was shrouded in secrecy.
What Medvedev was describing was the latest incarnation of a series of shadowy schemes operated by the Kremlin to trade gas between Russia and Ukraine, and with Turkmenistan. Large quantities of cheap gas from Turkmenistan could be routed through Russia’s pipeline network and mixed with Russian gas, and then sent on to Ukraine, making the overall price to Ukraine lower, even if Russia hiked its own prices. Instead of trading the gas directly through Gazprom, via a transparent system of pricing, it would be sold through a shady intermediary, opening the way for billions of dollars in profits to be siphoned out – and potentially handed out as kickbacks.
The way in which this was done was uncovered by the American-born William Browder, the dark-haired and determined manager of the biggest foreign-investment fund in Russia, Hermitage Capital. The grandson of long-time US Communist Party leader Earl Browder, he was a devout capitalist, and had become one of the most aggressive advocates for Russian corporate transparency, making it a cornerstone of his fund’s investment strategy to scour Gazprom’s books for signs of asset-siphoning. Late in 2003 his researchers stumbled across an obscure trader, Eural Trans Gas, to which Gazprom had granted the rights to transport billions of dollars’ worth of gas from Turkmenistan to Ukraine through its pipeline network a day before the company had even been created.[97] It was a deal that would siphon out nearly $1 billion in pre-tax profits for Gazprom, said Browder. Eural Trans Gas had been registered in a Hungarian village, and its four owners seemed almost uniquely unsuited for the task ahead. They were three Romanians with no business experience – an actress hoping to earn money to pay her phone bill, a nurse and a computer programmer – and an Israeli lawyer who counted one of Russia’s biggest mobsters among his clients. There was no reason, said Browder, why Gazprom should have handed over this trading channel to any independent outfit, never mind to one whose ownership looked to be clearly a front.[98] Gazprom had then gone on to grant Eural Trans Gas nearly $300 million in loans and guarantees. The US ambassador to Ukraine, Carlos Pascual, openly expressed concern about the firm’s apparent links to Russian organised crime.
In the ensuing scandal, Gazprom quietly wrapped up Eural Trans Gas, replacing it with Rosukrenergo. Ostensibly, Rosukrenergo was far more respectable than its predecessor – it was 50 per cent owned by Gazprom. But although it was held through Austria’s Raiffeisen Bank, the ultimate ownership of the other 50 per cent was initially unknown, and its participation in the trading scheme with Ukraine would still cost Gazprom more than $1 billion in lost revenues in 2004 and 2005, said Browder. Browder railed for a while against Rosukrenergo, briefing the press on the apparent corruption, but the scheme he was targeting represented a lot more than straightforward profit-skimming for personal enrichment: he was wading into the minefield of Russia’s efforts to exert influence over its near abroad. Rosukrenergo was essentially a slush fund that could be deployed as a tool of political influence to buy off and corrupt officials, to undermine democracy in Russia’s neighbouring states. It was central to the operations of Putin’s KGB regime, where an economy of smuggling was being rebuilt, and where influence, and not just profit, was a driving motivation. It was the first black-cash operation by Putin’s men to become visible to the West.
By the time Rybachuk was heading to the Kremlin to negotiate the new gas-supply deal, Browder’s outspokenness had landed him in hot water. He was being barred from entering Russia – because, the Russian foreign ministry said, he posed a national security threat. Ukraine’s new pro-Western leadership, meanwhile, had pledged to turn away from such murky gas-trading schemes. ‘Always it was a corrupted mechanism that allowed both sides to take tons of cash,’ said Rybachuk.[99] He added that the KGB was always behind these traders, and that Rosukrenergo, registered in the wealthy Swiss town of Zug, with two of its three directors former KGB officers, was no different.
But now it seemed the Kremlin was proposing a new gas deal, in which the role of Rosukrenergo would be boosted further still. Rybachuk returned to Kiev fully expecting that Yushchenko, who was meant to be turning Ukraine on a new course, away from the murky dealings of the past, would reject the scheme. What was more, Ukraine’s current gas-supply contract with Russia, which set the price at a low $50 per thousand cubic metres, was meant to be in force until 2009. When Rybachuk reported back, Yushchenko asked him to ask Ukraine’s Western allies – the US State Department and the German foreign ministry –whether they could provide alternative supplies should Russia cut off the country’s gas. Within two weeks, Rybachuk had received assurances of Western support. ‘They told us we would not be under pressure,’ he said. Rybachuk and his family left for a New Year holiday trip to Slovenia, convinced that the leadership was not going to cave to Russian pressure. It seemed unlikely to him, in any case, that Russia would risk going ahead with such a drastic measure as cutting off the gas supply.
But when he switched on the television on New Year’s Day, the headlines on CNN showed that crisis had struck. Russia had turned off gas supplies to Ukraine. And as Ukraine was a vital transit corridor for Russian gas, the pressure was also dropping at a succession of utilities across Europe. The winter that year was unusually cold, and Western leaders were in shock. That very same day, Russia was taking over the presidency of the G8 group of industrialised nations. This was supposed to herald a big step forward for the country’s integration with the global economy, and the theme of its leadership was meant to be energy security. Instead, the gas cut-off that day was the first clear signal of how Russia was defining its global integration in its own interests, how it would seek to undermine the global system to suit itself rather than adapt to the rules of the West. The cut-off, said the US State Department, ‘raises serious questions about the use of energy to exert political pressure’.[100]
Rybachuk was still expecting the West to step in with support. He knew that Russia could not leave the gas turned off for longer than three days, otherwise it would damage its own pipeline network. But at 3 p.m. the following day, the gas supply was suddenly turned back on.[101] Without Rybachuk’s knowledge, Yushchenko had agreed to the deal Medvedev had hinted at. The terms were surprising. Rather than losing the share of the trade it already had, Rosukrenergo was to be granted a monopoly on all gas supplies to Ukraine, as well as access to half its domestic distribution market. This agreement would allow Russia to save face and say it was selling gas to Ukraine at the vastly hiked price of $230 per thousand cubic metres. But that gas would be combined with cheaper Central Asian gas, allowing Ukraine to pay only $95 per thousand cubic metres overall.[102] Yushchenko declared the deal a ‘healthy compromise’, while Putin praised the ‘mutually beneficial decisions’.[103] But to Rybachuk, it stank: ‘I didn’t understand. There was the government of Russia and the government of Ukraine. Why did we need an intermediary?’[104] None of it fitted with the ideals of the Orange Revolution, that sought to turn Ukraine into a more transparent, Western-style economy. What’s more, Gazprom’s insistence that it was merely applying a market formula to the price of the gas was nonsense, said Rybachuk: ‘Gazprom was never using any market formulations. It was always using political components to determine the gas price.’ Belarus was still paying Gazprom $49 for every thousand cubic metres of gas, while Rosukrenergo was going to walk away with potentially billions of dollars in profits.[105]
Rybachuk said he’d never forget the words the US ambassador to Ukraine said to him when he returned to Kiev: ‘Welcome to the corruption club.’[106] The deal sent the Ukrainian government into chaos, sowing deep division between Yushchenko and his Orange Revolution prime minister Yulia Tymoshenko, who was bitterly opposed to Rosukrenergo and its gas-trading schemes. But Yushchenko and his fuel and energy minister, and the head of the state energy company Naftogaz, were resolutely behind it. It turned out that even before he dispatched Rybachuk to Moscow, Yushchenko had been holding talks of his own, meeting secretly with a man named Dmitry Firtash, a forty-year-old Ukrainian gas trader who secretly, with the Kremlin’s blessing, held most of the other 50 per cent stake in Rosukrenergo.[107]
Precisely how it happened Rybachuk still doesn’t know, but it seems that somehow Yushchenko had been compromised in the deal. Rybachuk’s suspicion fell on the close relations Firtash had cultivated with Yushchenko’s brother and with a Syrian businessman close to the Yushchenko family: ‘We can’t prove it. But it is the only logic for this deal being approved.’[108] Prime minister Tymoshenko, whose firebrand air and peasant-style blonde braids had symbolised Ukraine’s revolution for many, also railed against the deal. ‘Without corruption it was impossible to sign such an agreement,’ she said.[109]
From the moment of the deal’s signing, Ukraine’s pro-Western coalition became ever more divided, and the country was thrown into political chaos. Parliament passed a vote of no confidence in the government, and with parliamentary elections looming in March 2006, the pro-Russian presidential candidate Viktor Yanukovych, the former prime minister ousted by the Orange Revolution, and his Party of Regions were once again on the rise. Already weakened by infighting and an economic slowdown, Yushchenko was further undermined by the allegations that he’d been corrupted in the Rosukrenergo gas deal. By August, after months of political wrangling, Yanukovych, Russia’s man, was installed as prime minister.[110] Ukraine’s Orange Revolution dream of building closer political and economic ties to Europe seemed to be over, barely more than a year after it began.
To Rybachuk, the Rosukrenergo deal seemed a typical Russian influence operation: ‘To make sure that Ukraine was not led by a pro-Western alliance they tried to corrupt with all measures. Yushchenko was the first Ukrainian president who was not cleared by Moscow, which made Putin furious. The idea was to break the Orange coalition and to get back the pro-Russian candidate.’[111]
The deal was also an indication of how Putin’s KGB men were continuing to team up with organised crime to conduct their influence operations. Firtash, the Ukrainian who quietly held almost 50 per cent of Rosukrenergo, had always claimed that it was through his business savvy and connections with the Turkmenistan leadership that he’d been able to take over the Turkmen–Ukraine gas trade when Putin’s men kicked out the Yeltsin-era bosses. But in reality he would never have been able to accomplish that without the Kremlin’s backing. ‘He was 100 per cent Putin’s man,’ said one person who knew both Firtash and Putin.[112] He’d also never have been able to do it without the assistance of the major Russian organised-crime figure whose Israeli lawyer had originally registered Eural Trans Gas.
The mobster lurking behind Eural Trans Gas had many different passports and two different dates of birth. Sometimes he went by the name ‘Shimon’, sometimes he called himself ‘Sergei Shnaider’. But mostly to those who knew him he was ‘Seva’.[113] His real name was Semyon Mogilevich, a chain-smoking three-hundred-pound former wrestler who’d done time for arson, with hands like dinner plates and a pockmarked face, who’d become the brains behind moving money into the West for Russian organised crime. He’d started out in the seventies, helping the first wave of Jewish émigrés permitted to leave the Soviet Union sell their possessions to fund their trips. Mostly he’d helped to screw them over, said a former associate and a former Western official.[114] Later he became the go-to man for Russian mobsters laundering their funds into the West.[115]
Mogilevich himself had always insisted that he was no more than a businessman. He’d been so sure of himself that he told people that one day he wanted to make the Sunday Times rich list of the most wealthy people in Britain.[116] ‘He is just the bogeyman the West likes to connect to everything,’ his lawyer Zeev Gordon told me.[117] But according to the FBI and two of his former close associates he’d worked with the most powerful organised-crime group that emerged in those days. This was the Solntsevskaya group, a vast organisation whose tentacles extended across Russia and then into Ukraine, Central Asia and Hungary. It was headed by Sergei Mikhailov, otherwise known as ‘Mikhas’, a chubby gangster with a cherubic face and an angelic grin, and his partner Viktor Averin, or ‘Avera’. Mikhailov also liked to say he was just a businessman. But the two men were considered among the most dangerous in Russia. They’d made their first money running prostitution rings, and had then gone on to selling arms and drugs. ‘Who was Mikhas? Between us, he was a waiter and a pimp,’ said one of his former associates.[118] ‘As a waiter he had access to hard currency, and as a pimp he had access to even more hard currency from the whores.’ Mikhas and Avera had reputations as fearsome fighters: some called them ‘psychopaths’.[119] But they had little idea what to do with the dollars they were rapidly making. With a degree in finance from a university in western Ukraine, ‘the only one who knew how to invest was Seva’, said the former associate. ‘Avera and Mikhas were supplying the money. Seva was doing the logistics.’[120]
But Mogilevich had also always represented the interface between the KGB and organised crime as the KGB sought to move money out of the Soviet empire using organised-crime networks to act as fronts. Putin had continued this practice when he aligned himself with the Tambov group in St Petersburg, and further entrenched it under his presidency. Mogilevich had been recruited by the KGB in the seventies: ‘In return for informing on the Jewish community, he was allowed to flog the valuables of émigrés,’ said a former Western official.[121] As his business activities with organised-crime leaders expanded, so did his cooperation with the KGB. ‘Seva was always working for the security services,’ one person who worked with him said. ‘He was the criminal part of the Russian state.’[122]
Mogilevich’s presence behind Eural Trans Gas and in other dealings had been useful for the Kremlin, said people familiar with the matter. He could be brought out during the more heated parts of negotiations with Kiev over the price of gas: his connections with local organised-crime networks served to remind Ukrainian officials of the power of the people they were dealing with. In addition, ‘His role was to remind the Ukrainians that at the end of the day they’d been bought,’ said a former Western official.[123]
But the open involvement of Mogilevich’s lawyer in registering Eural Trans Gas had become too much of a political hot potato for Gazprom. Even though the state gas giant denied that he had anything to do with it, his fingerprints on the operation had become too evident. In those days Mogilevich was on the FBI’s Top Ten Most Wanted List: he and his associates had been charged with stock fraud by the US Department of Justice for bilking American investors out of $150 million in investments by falsely representing the business of a magnet manufacturer, YBM Magnex, they’d listed on US and Canadian stock exchanges.[124] What’s more, the FBI alleged that he was involved in weapons trafficking, contract murders, extortion, drug trafficking and prostitution on an international scale.
Firtash had come in as a replacement, a more acceptable face. He always insisted he’d severed all ties with Mogilevich as soon as he took over the Turkmen-Ukraine gas trade, buying out a shareholding held by Mogilevich’s wife in one of the companies he took control of in 2003,[125] and that he’d never had any business dealings with Mogilevich himself.[126] But traces of linkages in the network of companies behind Rosukrenergo remained.[127] Later, Firtash would admit to the US ambassador to Ukraine that he’d received Mogilevich’s permission to set up businesses.[128] In those days, in the explosion of crime that followed the break-up of the Soviet Union, it was impossible to meet a member of the Ukrainian government without also coming into contact with figures from organised crime, he said. But others said the ties went deeper. ‘Without Seva, Firtash would be nothing,’ one of Mogilevich’s former associates told me. ‘Whatever Firtash has, he has from Seva.’[129]
Like the Russian organised-crime networks that began to stretch into Europe via Austria and then into the US, the Firtash and Mogilevich connection was part of the underbelly of Putin’s influence operations. But as Rosukrenergo’s accounts filled with cash, Firtash rose in respectability. He became a powerbroker in Ukraine whose influence stretched across the political divide. First he’d worked with Yushchenko. Then, as Yushchenko faded, tainted by the gas deal scandal, he worked closely with the Kremlin’s candidate, Yanukovych, who began to stage a political comeback almost immediately.[130]
Later, Firtash was among a handful of Ukrainian tycoons who worked with Paul Manafort, the suave American political lobbyist brought in to groom Yanukovych’s image as an anti-corruption candidate.[131]
The cash Firtash’s group made in Ukraine began flooding into Europe. Rosukrenergo was reporting a net annual income of about $700 million, while the vast chemicals group Firtash also owned was making billions of dollars more. He based his empire in Vienna, a major gateway for Russian cash into the West since Soviet times, registering his half of Rosukrenergo there as part of a broader company he named GroupDF.
Firtash was making a base in a city that was laden with secrets. Vienna’s location at the crossroads between the great powers fighting the Second World War, and then on the dividing line between East and West during the Cold War, had long made it the spy capital of the world. Since 1955 Austria had been a neutral country, and the laws governing spying there were notoriously lax. Once filled with starving refugees ready to give away their country’s secrets for a slice of bread and a glass of beer, its historic streets were still home to thousands of spies. But while some had written off political espionage as irrelevant in the days of the West’s post-Cold War domination, many failed to note the Russian operations quietly taking root in Vienna, such as those connected to Firtash through Rosukrenergo and another shadowy Gazprom gas-trading intermediary called Centrex. These companies were on the front line of a different type of political operation – an extension, perhaps, of how Putin’s men had operated in Ukraine. At the interface between Russia’s burgeoning economic clout and Putin’s ambition to restore the country’s geopolitical standing, they represented layer upon layer of non-transparent ownership structures in which opportunities for cash-siphoning and influence-peddling were rife.
In Vienna Firtash was joining forces with Andrei Akimov, one of the top financiers of the Putin regime. A KGB banker who’d funded Gennady Timchenko, Akimov had set up an investment outfit, IMAG, in the city in 1990. Akimov, who of all Putin’s men had kept the lowest profile, became connected to many of the Gazprom-linked intermediaries. Soon after Putin took over the presidency, he’d been appointed head of Gazprombank, which held tens of billions of dollars in assets and became a financial nest for Putin’s men through its transfer to Bank Rossiya. Gazprom’s stake in Rosukrenergo had been held through a Cyprus offshore company associated with Gazprombank, and Akimov had taken a seat on Rosukrenergo’s coordination committee. There he was joined by Firtash and his associates, as well as by his own long-standing deputy Alexander Medvedev, who by then was head of Gazprom’s most strategic unit, Gazexport, which controlled all the state gas giant’s exports. Together they oversaw the billions of dollars that were transferred from Gazprom’s coffers to Rosukrenergo, as it began independently exporting excess gas from Ukraine into Europe.
Old networks from the Cold War past were being reconnected as Rosukrenergo became one of dozens of Gazprom-connected trading intermediaries springing up across Europe. In Berlin there was Gazprom Germania, which was staffed by many former Stasi agents.[132] Gazprom’s foreign operations had always been ‘a nest for Russian intelligence’, said a senior banker with connections at the top of the Kremlin.[133]
In Vienna, Akimov’s associates and others behind Rosukrenergo also intersected with another member of the old KGB and Stasi networks, and one who was directly connected to Putin’s Dresden past. This was Martin Schlaff, the former Stasi agent who’d worked in Dresden to smuggle embargoed technology from the West, siphoning hundreds of millions of Deutschmarks through fake contracts to preserve Stasi networks after the fall of the Berlin Wall.[134] Schlaff had entrenched himself in Vienna as one of the nation’s most powerful businessmen. By the time Putin was in power he was in his fifties, and had expanded the pulp and paper trader in which he’d employed Herbert Kohler, the Dresden Stasi foreign-intelligence chief, following the collapse of the Soviet Union.[135] A billionaire with a penchant for Cuban cigars reportedly brought to him personally by Fidel Castro’s envoy, he owned casinos across Central and Eastern Europe, and in Israel. He had ties at the top of the Austrian banking system, and deep into its political system, while his connections to Russian organised-crime networks appeared to run deeper still.[136]
When Gazprom, via Akimov, set up another European intermediary, Centrex, for supplying gas to Austria, Switzerland, Italy and Hungary, Schlaff and one of his close business partners took stakes in its Vienna-based arm, Centrex Europe Energy and Gas AG.[137]
The Centrex operation was another outpost of Gazprom’s trading empire that was soon making hundreds of millions of euros through murky trading schemes and opaque ownership structures.[138] It had been set up by the same Cyprus offshore company through which Gazprom’s stake in Rosukrenergo was meant to be owned. Yet it filed no financial reports for 2005 and 2006.[139] The trading outfits were structured through Byzantine layers of complexity – and most of them seemed to bypass Gazprom. For some experts, the complicated ownership structures sent alarm bells ringing. ‘The lack of transparency, the practice of hiding the names of the beneficiaries, the use of offshore nameplate companies, and the secretive nature of Gazprom’s contracts with its clients bode ill for the EU,’ wrote energy expert Roman Kupchinsky in an in-depth report on the schemes. ‘Such elaborate layers … are an indication of money laundering and possible kickbacks to officials involved in their creation.’[140]
In those days, few policymakers, it seems, paid much heed. Schlaff’s presence, however, was an indication that the gas-trading schemes, like Rosukrenergo, were about more than cash-siphoning. He was a representative of the Cold War networks of the past, an influence-peddler who’d been investigated by the Israeli police for the suspected bribing of Israel’s prime minister Ariel Sharon.[141] His influence ran far and deep, not just in Austria but across the Middle East, where he’d cultivated senior Israeli and Arab politicians, including the Palestinian leader Yassar Arafat, Libya’s Muammar Gaddafi and Syria’s Bashar al-Assad.[142] He appeared to be an integral part of an influence network that had been preserved since Soviet times. The leaders of the Arab world he’d built ties with were the same men cultivated by Soviet foreign-intelligence agents during the Cold War.
In 2005 Centrex became mired in scandal when Italy’s parliament uncovered its involvement in an operation to funnel funds to a close friend of the Italian president Silvio Berlusconi. Gazprom had agreed with the Italian energy giant Eni to sell gas to Italy through yet another murky company, owned 41 per cent by Centrex and 25.1 per cent by Gazprom’s export arm Gazexport, while the remaining 33.9 per cent was held by two companies owned by Berlusconi’s friend. When they discovered the connection, Italian lawmakers were outraged that some of the firm’s expected $1 billion in annual revenues would be heading to this friend, who they believed was no more than a front for the president himself.[143]
They were able to block this particular deal. But members of Berlusconi’s political party later told the US ambassador to Italy that they believed he was still profiting ‘handsomely’ from other undisclosed energy deals.[144] Putin’s men were again building on connections forged long ago in Soviet times, when Berlusconi had been one of the intermediaries working closely with the Soviet Politburo.
The initial intention of such operations was to create a platform from which Russia could seek to influence European policy, a former Austrian security chief who’d once worked closely with Akimov told me.[145] By 2009 the US ambassador to Italy, for instance, complained that Berlusconi’s pro-Russian public statements were undermining Western unity on US security initiatives such as the missile defence shield in Eastern Europe and NATO expansion. Putin’s men were laying down deep roots in Europe. London became a particular target: Firtash took up a place at the heart of the the city’s establishment, and his chief London minion funnelled hefty donations to Conservative Party grandees. If, in the beginning, the aim had been to seek to undermine Western unity on security initiatives counter to Russian interests, things were later to take a more sinister turn. To Oleh Rybachuk, the former chief of staff to Ukrainian president Viktor Yushchenko, Firtash’s investments in London seemed to follow a previously-trodden path. ‘Ukraine was a training ground for Russia’s undermining of the EU,’ he said.[146]
The black-cash operations of Gazprom’s web of intermediaries were just the beginning of Putin’s efforts to restore Russia’s global influence. In Russia itself, a gradual transformation was still under way, with Putin’s KGB men taking over greater swathes of the economy. By the end of Putin’s second term as president, the economy was increasingly resembling a feudal one. For the Geneva banker Jean Goutchkov and his associates, it was only natural that Russian businessmen should feel they owed everything to a modern-day tsar. ‘It is an oriental people. They have a different understanding of life, of existence,’ said one of the Geneva money men. ‘Because of the scale of the territory, the understanding of ownership is absolutely different. Ownership of people was part of this central culture. They were owned by masters for centuries, and then they were owned by the Party. They need to have an owner, a strong tsar.’[147]
Cowed by the legal attack on Khodorkovsky, the remaining Yeltsin-era tycoons were, one by one, beginning to vow fealty to the Putin regime. The unruly media tycoons Gusinsky and Berezovsky had been exiled, their assets taken over by the state. A consolidation of assets was occurring across industry – in particular in the strategic-metals sector – and the new leaders who emerged all bowed to the Kremlin’s might. But it was Roman Abramovich, the billionaire oil trader who’d taken over Berezovsky’s business empire, a powerful broker long considered the purse-holder for the Yeltsin Family, who performed the first and most overt act of fealty of all.