When Roman Abramovich headed out to serve as governor of the far east region of Chukotka, a remote, ice-locked area across the Bering Strait from Alaska, it was still the first year of Vladimir Putin’s presidency. His destination was a godforsaken place at the ends of the earth, 3,700 miles from Moscow, where trees rarely grew and the winds howled so viciously they swept dogs from their feet and hurled them across the street. Chukotka had always been sparsely populated, but its inhabitants had all but deserted the region following the Soviet collapse. The population had plummeted from 153,000 to 56,000 by the time Abramovich arrived, and those who remained were struggling to survive, ground down by poverty and alcoholism. He’d gone there, he said in a rare interview, because he was ‘fed up’ with making money all the time.[1] He always presented the move as his own decision, claiming that he wanted to drive ‘a revolution towards civilised life’.[2] Promising to change things for the better, he won the December 2000 election for governor with 92 per cent of the vote.
The local population of Chukotka worshipped the ground Abramovich walked on. The stubble-faced tycoon with a shy smile had grown up an orphan, raised by his grandparents in a bleak, hardscrabble northern Russian oil town. But now he was acting as benefactor to the region’s residents, shipping in a team of executives to work on improving living standards. They built new television and radio channels, a bowling alley, a heated indoor ice-rink and a movie house. He spent tens of billions of his own roubles in the process.[3] It was as if he was bowing immediately in an act of fealty to Putin’s calls for big business to take on more social responsibility after the excesses of the nineties.
In fact, he hadn’t been given much choice. According to a tycoon close to him, he was sent to Chukotka on Putin’s orders,[4] because Putin wanted the fortune Abramovich had made through his stakes in the oil major Sibneft and in Rusal, the aluminium giant that controlled more than 90 per cent of the nation’s output, to be at his command. It wasn’t enough that Abramovich’s charitable foundation Pole of Hope was ready to later donate $203 million to Petromed, the medical-equipment-supplies company connected to Bank Rossiya.[5] Putin wanted to be able to access the rest of Abramovich’s cash too, and the laws of the time made it easier to jail officials than businessmen. ‘Putin told me that if Abramovich breaks the law as governor, he can put him immediately in jail,’ said the Abramovich associate.[6] Abramovich’s investment of large amounts of his own fortune in Chukotka seemed to reduce his risk. But the threat of back tax charges similar to those levied against Yukos seemed always to hang over his Sibneft – especially as Abramovich’s personal investment in Chukotka was part of a two-way process that left him yet more firmly on the Kremlin’s hook. Soon after he became governor, Sibneft transferred a large portion of its oil sales through trading companies registered in the far east region, which were promptly granted hundreds of millions of dollars in tax breaks.[7]
These tax schemes were remarkably similar to the ones that had landed Khodorkovsky in jail – and they provided Sibneft with an opportunity to pay even less tax than Yukos did.[8] As if in warning, just a few months into his governorship Abramovich was hauled in to the Moscow prosecutors’ office for questioning.[9] The alleged tax fraud in question seemed comparatively tiny: $350,000 in underpayments. But three years later, in March 2004, just after the Russian tax ministry levied the first of a series of back tax claims that would eventually bankrupt Yukos and see it taken over by the state, the sum suddenly grew. Sibneft was now being probed over $1 billion in alleged underpayments for the year 2001.[10]
Nothing happened as a result of the investigation, and Sibneft always insisted its tax schemes were in line with the law.[11] But the ever-present threat of tax fraud charges was part of a process that was gradually turning the Yeltsin-era oligarchs into loyal vassals. Abramovich, long before the others, had been first among them. As if to underline that, when, after eight years’ hard service his term as governor of Chukotka was finally up, Putin told him his next destination would be another impoverished and desolate region in Russia’s far east. ‘He is a young guy. Let him work,’ Putin had said.[12] ‘He was meant to go to Kamchatka, and spend even more of his resources,’ one person close to Abramovich said. Eventually, and only after long bargaining, was Abramovich finally let off the hook.
After Khodorkovsky’s trial, Russia’s businessmen were all too aware that a criminal case could be opened against them at any time, in which, guilty or not, the odds would be stacked against them from the start. A feudal system was being resurrected, where the owners of the country’s biggest companies, especially those in the strategic resource sector, were beginning to operate as hired managers, working on behalf of the state. They were no more than the guardians, and they kept their businesses by the Kremlin’s grace.
This mentality had its roots in the tsarist system, in the beliefs of men like Jean Goutchkov and Serge de Pahlen. Putin’s KGB men were the new imperialist rulers of the country, the rightful owners of its resources, and its assets were to be parcelled out to Kremlin favourites who would work for the state and of course pay tributes to their masters. ‘By 2003 the first stage of Russia’s transition – the stage of oligarch capitalism – had finished, and the second stage – of state friendly capitalism – began,’ said Yevgeny Yasin, an influential economist who’d been a leading figure in that transition. The KGB men who’d come to power, he said, considered that they had every right to regard the country’s wealth as their own: ‘They believe they held the country back from total collapse. But in fact, they just seized power, and the country is being run for the preservation of the ruling elite.’[13]
*
The signs should have been troubling. But for a long time, it seemed the West didn’t understand the depth of Russia’s transformation. The rise of Putin’s KGB men was evident as they asserted control over the country’s strategic energy sector, and the boards of the biggest state companies. But to Western eyes, the rest of the nation’s business still appeared to be largely independent. Yeltsin-era tycoons like Abramovich were seen as symbols of modernising, pro-Western forces in the Russian economy. Most importantly, it seemed, for once the economy was booming, and hopes grew that an emerging middle class would one day demand a greater say in the political process.[14]
Ever since Putin had been anointed Yeltsin’s successor, oil prices had surged, fuelling an economic recovery. By 2005 they’d tripled, and Russia’s disastrous $40 billion debt default and the rouble devaluation of 1998 seemed a distant memory. By then the country had $150 billion in hard-currency reserves, the world’s fifth largest.[15] Under the guidance of the liberal-minded finance minister Alexei Kudrin, the government had created a stabilisation fund out of the windfall oil-tax revenues it had reaped since it made the tax-code changes so resisted by the oil barons. In 2005 this fund, which was meant to act as a buffer for the economy in case of a sudden oil-price drop, stood at $30 billion.[16] By the following year it was at $70 billion, while foreign reserves had soared to $260 billion.[17] Oil prices by then had climbed to more than $60 per barrel, compared to $17.4 in 1999, when Russia was barely emerging from its latest economic crisis and Yeltsin had anointed Putin his successor. The oil-price surge had changed everything. The economic turmoil that had helped convince Yeltsin’s Family to cede power to the security men seemed a world away.
While Roman Abramovich toiled to improve living standards in Chukotka, in Moscow and in other regional capitals a more spontaneous transformation was under way. Slowly at first and then ever faster, bright European-style shopping malls were being built in city centres. The likes of Mango, Benetton, Diesel and Adidas replaced the dingy food and Soviet-style department stores of the not-too-distant past.[18] Swanky restaurants in cities in the depths of Siberia served lamb from New Zealand, veal from Australia and wine from France.[19] Consumer spending was soaring. Russia was suddenly starting to grow a middle class. People finally had money to spend after a decade in which their savings had twice disappeared overnight. With the oil price climbing, economic growth averaged 6.6 per cent in the years after Putin was elevated to the presidency, while the average monthly wage quadrupled.[20]
These were days of plenty and stability. And although the oil-price surge driving it was entirely unconnected to him, these were the days when Putin’s godlike status as the tsar who saved Russia was established. It was part of an unwritten pact that the people of Russia seemed to have made with their president. They chose not to notice the increasing state corruption, the growing arbitrary power of the FSB and all branches of law enforcement over businesses large and small. They didn’t care about the clampdown on media freedom as long as their incomes were growing, as long as there was finally stability. They were beginning to live like their European neighbours. Putin and his KGB men, it seemed, could jail whoever they wanted, as long the emerging middle class could afford an annual holiday in the likes of Turkey.
In any case, the tales of the KGB takeover at the top, of the asset-siphoning and the subversion of the legal process, didn’t reach most of the population, as Putin’s Kremlin had taken over the media and eradicated all political competition. The Kremlin takeover of all levers of power meant the population had been alienated from the political process. But in what one analyst, Masha Lipman, later called the Russians’ ‘Non-Participation Pact’,[21] they were content to let the Kremlin monopolise political and economic decision-making, as long as it didn’t intrude into their own lives. This was an altogether different model from that of Soviet times. Then, the overweening power of the Party and the KGB had infringed on almost all aspects of daily life. Now, as long as the security services’ interests weren’t encroached on, they stayed well out of it. Most of the population readily accepted the new system, which further cemented the manner of governing prevalent in Russia since the time of the tsars. It was, Lipman wrote, ‘the perennial Russian order – the dominant state and a powerless, fragmented society’.[22]
The KGB-connected businessmen I spoke to often referred to this mindset to justify their actions and their rule. It was, they said, the tragedy of Russia that its people did not want to participate in politics – indeed, they didn’t know how to. This had been deeply ingrained in the national mentality since Russia began, they would say, sadly shaking their heads. But in fact they were merely seizing on a convenient excuse to convince themselves that they were right not to allow the people to participate in democracy. The KGB had learned well the lessons of the Soviet past. Instead of an overbearing state, capitalism had become the instrument that allowed them to act as they wanted. Indeed, they believed that, just as the Geneva associate of Jean Goutchkov had cynically put it, people were content if they had ‘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.’[23]
Some Western policymakers, however, continued to believe in a different dream for Russia’s rising middle class. Their hope was that eventually, as their incomes and ability to access Western countries grew, people would demand more political rights.[24] Emboldened by the apparent Cold War victory, and the expansion of the European Union into the countries of the former eastern bloc, the West believed in Russia’s global integration and opened its markets ever wider to it. Belief in the power of globalisation, in liberal markets and democracy was at its zenith. Europe’s eastward expansion was ‘the most important contribution to peace, stability and prosperity in Europe in recent years’, said the EU Commissioner for Enlargement, Gunter Verheugen, in the heady days of 2004.[25]
Russian companies were rushing to list their shares on Western stock exchanges, in particular in London. In 2005 alone they raised more than $4 billion in share sales in London, compared to $1.3 billion in all markets in the thirteen years after the Soviet collapse.[26] It was firmly believed in the West that these companies, and the mostly Yeltsin-era tycoons behind them, represented Russia’s future. Despite fears aroused by the state’s takeover of Yukos, the conviction was that the growing number of offerings was a sign that Russia was maturing as a market economy.
The businesses heading to London had to have three years of audited accounts to international standards under their belts, as well as at least six months of shares being listed in Moscow, to qualify for being listed on the London Stock Exchange.[27] Many in the Western policymaking world believed that the more Russian companies listed in the West, the more they would have to adapt to Western rules of transparency and governance. ‘The belief was that the oligarchs who were listing would have to abide by corporate governance rules, that they would become part of the global system,’ said Nigel Gould-Davies, a former economic attaché at the UK embassy in Moscow and later the UK’s ambassador to Belarus.[28] Instead of the aggressive behaviour of the nineties-era transition, he said, ‘they would change their behaviour because they had to’. A listing in London was also seen as offering an extra layer of protection from attack by Putin’s siloviki, and a prized symbol of respectability.
Western bankers and policymakers rested their hopes on the growing army of Russian companies in London contributing further to the growth of Russia’s middle class. The developing generation of businessmen, it was thought, would one day bring pressure on Putin’s government for a liberalisation of the political and economic environment. ‘The chances are high that things will keep moving in the right direction, because of the changes in society,’ said Stephen Jennings, the New Zealand-born head of one of Moscow’s biggest investment banks, Renaissance Capital. ‘At some point these conditions will demand a much more liberal and modernising leader. We just don’t know whether that is going to be the next one or the one after.’[29]
Western bankers flocked to Moscow in search of fees – some in the firm belief that they were doing ‘God’s work’ by bringing the markets to the people and freeing them from the heavy hand of the state. Delegations flew in to Moscow regularly from the City of London, touting for business, stressing the benefits of London’s ‘light-touch regulation’.[30] At a time when emerging markets across the world were booming – most notably in China and in India – Russia had become the biggest source of international offerings on the London Stock Exchange.[31]
It was perhaps because the City of London had become so enthralled by the flood of cash that bankers and investors often chose not to worry that the next wave of Russian offerings was entirely different. The companies coming to London were now mainly the new behemoths of Putin’s state capitalism, which had zero interest in liberalising the Russian economy. The City also chose to ignore the fact that there were large gaps in the transparency of the ownership structures and the financial accounts of some of these companies. One of the reasons Russian companies were heading to London in droves was that the standards required for listing there were far less stringent than those in New York. In the US, regulations required the chief executives and finance directors of companies seeking a stock exchange listing to sign off on the accuracy of the financial accounts.[32] If anything turned out to be not true or misleading, it was treated as a criminal offence. ‘No Russian company was ready for this. We needed another five years to clean up, maybe more,’ said Dmitry Gololobov, a Russian lawyer who worked on a US listing of global depositary receipts for Yukos, which dropped the plans due to the risks.[33] In London, however, companies listing global depositary receipts were welcomed by a system that allowed a much lower level of due diligence, and left investors responsible for checking whether the information provided by the company was correct or not.[34]
London’s Financial Times wryly noted that the pages of the share prospectus for one upcoming London offering, Novolipetsk steel, contained ‘more drama than a Dostoevsky plot’.[35] It revealed a wilderness of insider dealing and opaque transactions. Tens of millions of pounds were being given in interest-free loans to obscure companies later acquired by Novolipetsk’s controlling shareholder. Millions more were being handed out in ‘consultancy fees’ to the same person. Most notably, Novolipetsk’s privatisation had taken place in Russia’s Darwinian wild-east 1990s, and the company admitted that its ownership and title to any other company it had acquired could be challenged at any time. But still investors piled in. Tony Blair’s government seemed to have given the order for London to throw open its doors to Russian money, regardless of its provenance.
Russian listings were providing London with a huge stream of income for armies of bankers, lawyers, consultants and PR firms. The city was awash with Russian cash. But instead of Russia being changed through its integration into Western markets, it was Russia that was changing the West. The tycoons coming to London, who the West hoped would become independent driving forces for change, were instead becoming more dependent on the Kremlin. They were vassals of Putin’s increasingly authoritarian and kleptocratic state. Instead of bringing Russia into line with its rules-based system, slowly the West was being corrupted. It was as if a virus was being injected into it.
*
The path had been smoothed in part, it seemed, when Roman Abramovich bought London’s Chelsea Football Club in the summer of 2003. The £150 million ($240m) purchase was something of a PR coup. London newspapers marvelled at Abramovich’s private Boeing 767 as he swooped into London to inspect his new club. They devoted copious column inches to his luxury yachts, including the world’s biggest, the Eclipse, a 168-metre floating palace kitted out with two helicopter pads and its own submarine. The secretive oligarch, stubble-faced and dressed simply in jeans, was lauded as he spent lavish funds buying world-famous players for Chelsea, and upgrading its Stamford Bridge stadium. Few asked where his money came from. ‘It’s very good exposure,’ one former Abramovich associate said. ‘With Chelsea, he’ll get three pages in the back of the papers, and there’s nothing bad. No one questions him.’[36]
Putin’s Kremlin had accurately calculated that the way to gain acceptance in British society was through the country’s greatest love, its national sport. According to Sergei Pugachev, from the start the acquisition had been aimed at building a beachhead for Russian influence in the UK.[37] ‘Putin personally told me of his plan to acquire the Chelsea Football Club in order to increase his influence and raise Russia’s profile, not only with the elite but with ordinary British people,’ he said.[38] Putin had directed Abramovich to buy the club, claimed a Russian tycoon and a former Abramovich associate. ‘It was a great operation. No questions were asked.’ The purchase made Abramovich an instant celebrity in Britain. An invitation to watch a match from his private box was one of the hottest tickets in town.
Abramovich’s move into Premier League football had also been aimed at increasing Russia’s clout with FIFA, the International Football Federation, which later chose Russia to host the 2018 World Cup. ‘Roman was asked by Putin to go into football,’ said the former Abramovich associate. ‘He thought they should do it to win influence in FIFA, which was well-known as a corrupt organisation.’[39] ‘Through Chelsea, he got an entry ticket into the football world,’ said the Russian tycoon. ‘He was able to use it to lobby for the World Cup, which meant a lot for Moscow. They wanted to win the hosting to show to people that Russia was not in isolation. It was very important for them.’[40]
A person close to Abramovich denied the tycoon was acting under Kremlin direction when he bought the club.[41] But whatever the truth of the matter, Abramovich’s choice of Chelsea became a symbol of the Russian cash that was flooding into the UK, and his ready acceptance helped Russian money become part of the fabric of London life. ‘It was also an entry ticket into UK high society. It was an entrance into the House of Lords,’ said a former business partner. ‘He created a club at Chelsea especially for this.’
The reason few questions were asked about Abramovich was partly that he appeared at first glance to have nothing to do with Putin’s KGB men. He’d continued to maintain close ties with the Yeltsin Family – with Valentin Yumashev and with Alexander Voloshin, the Yeltsin-era Kremlin chief of staff. He was seen as the acceptable face of Russian business, a representative of the more liberal wing of the Russian elite the UK was so anxious to cultivate. But this perception was in fact no more than a convenience for Putin. ‘Putin likes people like Abramovich and Yumashev to travel the world and tell people he’s not such a crocodile,’ said Alexander Temerko, the former Yukos shareholder who by the end of 2004 had fled Russia for the UK. ‘He needs them to do this for him. They are voluntary unpaid ambassadors for him.’[42]
Whether he wanted to or not, Abramovich had become part of the Putin machine, one of the Kremlin’s trusted custodians. He played an integral role in helping create a KGB capitalism that was becoming turbocharged as it extended its reach into the West while energy prices continued to soar. His Sibneft oil major was part of that transformation. In September 2005 it too was swallowed up by the state as the Kremlin continued its drive to take control of the strategic energy sector. But instead of winding up in jail like Khodorkovsky, his company bankrupted over billions of dollars in back tax charges, Abramovich was able to sell Sibneft to the state for $13 billion – cash. But barely any of the earnings were to be considered his own. Instead of merging with Yukos and selling the company to the US’s Exxon or Chevron as he and Khodorkovsky had once planned, Abramovich had bowed instead to the Kremlin’s new order. Once again, he had little choice. The sale of Sibneft to Gazprom at the end of 2005 was another stage in the process by which the Kremlin’s energy takeover gained international legitimacy, further fuelling the Russian stock market boom. It was the moment when Abramovich’s wealth became even more wedded to the Kremlin than before.
The deal was done in a multi-step process that began barely two weeks after a Moscow court finally pronounced the guilty verdict against Khodorkovsky in May 2005. It was then that the Russian government sought to boost foreign investors’ mood with the ultimate enticement, announcing that it was going to borrow $7 billion from international banks to raise its stake in Gazprom to a controlling 51 per cent.[43] This was the move foreign investors had long been waiting for. It might have seemed counter-intuitive that more government control over Gazprom would be good for them, but for years they’d been locked out of freely trading shares in the world’s biggest gas producer, because the Russian government didn’t officially own a majority stake in it. In effect, of course, the state controlled the gas giant, but on paper it only owned 38 per cent, and the government feared that, without restrictions on the amount they could own, foreign investors could take over Russia’s most strategically important company. The previous year, when it announced plans to merge Gazprom with Rosneft, the government had dangled the prospect that it could raise its stake to a controlling one, and lift the restrictions, thereby creating the world’s biggest energy major accessible to foreign investors. But these plans fell apart when Yukos filed its last-ditch suit for bankruptcy protection in Houston, and Rosneft acquired Yukos’s Yuganskneftegaz instead of Gazprom, because of the legal risks. Rosneft’s takeover of Yugansk fuelled the ambitions of its chairman Igor Sechin to build his own state energy giant, independent of Gazprom, and infighting between the two state titans scuppered the merger plan.
Now that the dust had settled, the government was announcing a much simpler deal. It was going to borrow $7 billion from international banks to buy the shares it needed to boost its stake in Gazprom, and it was going to buy the shares from the company itself. The announcement sent ripples of cheer through the stock market after the gruelling Khodorkovsky case. Now that Khodorkovsky’s trial was over, investors believed a corner had been turned. Lifting the so-called ring-fence restrictions on foreign ownership had always been seen as a way for the Kremlin to buy the favour of foreign investors after the toxic forced sale of Yugansk. Now the foreign investors hoped that the Khodorkovsky verdict would be the end of the state onslaught, that his trial was an isolated case, and the Kremlin wasn’t going to seize any more assets. The stock market boomed, the Russia RTS index doubling in six months. The growth that had been stunted during the Khodorkovsky affair had been fully recovered, driven by Gazprom shares, which soared more than 100 per cent.[44] It was part of a wilful blindness to the state’s growing reach: that didn’t matter, as long as stock prices were going up.
Gazprom, in turn, announced that it was going to use the cash it received from the government for its shares for an acquisition of its own: rather than bankrupting Abramovich’s Sibneft and then seizing control, it was going to buy it. This was a compromise amid the infighting with Sechin that would give Gazprom an oil operation of its own. In the end, Gazprom purchased Sibneft from Abramovich for $13 billion, in a deal that seemed to underline how much Abramovich’s fate differed from Khodorkovsky’s.[45] The deal handed over yet another oil major from the private sector into the hands of Putin’s men. But Abramovich appeared to have walked away with a fair market price for his company, without the forced sale, bankruptcy and back tax charges of the Khodorkovsky case – despite the fact that Sibneft paid an even lower effective tax rate than Yukos ever had. It was lauded as the biggest takeover deal in Russian history, and was seen by the market as a sign that the Kremlin had moved on from the Yukos affair, and that further expropriations would not occur.
But in fact it was just another evolution of an emerging KGB capitalism in which nothing was quite as it seemed. Rumours flew that Abramovich had had to split the lion’s share of the $13 billion he’d received with Putin’s men. ‘I’ve been saying for a long time that Putin is a business partner of Abramovich’s,’ said his former business partner Boris Berezovsky at the time. ‘I have no doubt that the profits from the sale of Sibneft will be shared between Abramovich and Putin as well as among several other individuals.’[46]
‘It’s not just his money,’ a Russian tycoon once close to Abramovich said.[47] ‘He is Putin’s representative.’ ‘No one knows how much he’s got,’ said another former associate.[48] Another Russian tycoon said Abramovich had once complained to him that he’d had to spend more than his share of the money from the Sibneft sale on implementing orders for Putin – on building football stadiums in Russia, on investments in Chukotka, and other strategic operations for the Kremlin’s benefit.[49]
It was becoming a system in which all businesses of any scale were dependent on the good will of the Kremlin, where tycoons had to serve the state in order to preserve their standing and wealth. But it was also a system that, by stealth, was gaining ever greater international acceptance and legitimacy. While the West had immediately accepted what it believed were liberal-minded tycoons like Abramovich, it had also begun to reconcile itself to the Kremlin’s new energy order. The following year, in the summer of 2006, it waved aside concerns over the de facto confiscation of Yukos’s main production unit, Yugansk, and allowed Rosneft to conduct an initial public offering on London’s stock exchange. It was then that the first real blow to the integrity of Western markets occurred.
The share sale of Igor Sechin’s Rosneft that year had been hailed as one of the world’s biggest. Initially the company said it planned to raise $20 billion, a sum that would have broken records.[50] Though it later reined in the amount to half of that, the volume was still eye-watering for Western bankers, who rushed to take a slice of the $120 million in fees.[51] The IPO, still the third-biggest in the world that year, was essentially an investor referendum on the Kremlin’s takeover of Russia’s energy sector. The Western executives who continued to run what remained of Yukos from exile railed against the sale, claiming that it would be tantamount to abetting the sale of stolen property, and appealed to the UK markets regulator, the Financial Services Authority, to halt it.[52] Everything about Rosneft’s takeover of Yugansk, they said, had been illegal – from the selective and retroactive back tax charges that led to the forced sale, to the discount sale itself, which was in breach of a temporary injunction issued by the Houston court.
For those who’d watched in horror as Putin’s KGB men had subverted the legal process to seize control of Yugansk just over a year before, the listing raised deep moral and ethical questions. George Soros, the billionaire investor-turned-philanthropist, wrote to the Financial Times questioning whether the IPO should be allowed to go through at all: ‘To argue that it will improve transparency ignores the fact that Rosneft is an instrument of state that will always serve the political objectives of Russia in preference to the interests of shareholders.’[53] For other defenders of Yukos, it seemed that a successful IPO would be seen by the Kremlin as a seal of market approval. ‘Western leaders must take a realistic and long-term view of the implications of appeasing the Russians on such issues of fundamental human rights and the rule of law,’ wrote Robert Amsterdam, an attorney for Khodorkovsky, by then well into his first year in prison camp in Russia’s far east. ‘If not, those presently in power in Russia will take Western double-standards as a licence for impunity. To deny, dismiss or discount the gravity of the consequences is to turn a blind eye to the lessons of history.’[54]
Although what Amsterdam wrote now sounds like a warning of what was to come, Putin’s men had accurately calculated that, for the West, money would outweigh all other concerns. ‘At the end of the day, everyone’s out to make money and the Kremlin knows it,’ said Harvey Sawikin, the head of the New York-based hedge fund Firebird Management.[55] Despite all the protests and the threat of lawsuits, the IPO went ahead, presented as a triumph for Putin as he played host to the G8 group of developed nations in St Petersburg that summer. Rosneft was valued at $80 billion, an enormous transformation since before its acquisition of Yugansk for a mere $9.4 billion,[56] when Rosneft was estimated to be worth no more than $6 billion. The vaulting valuation was testimony to the power of Putin’s KGB cohort, and the knowledge that their backing for Rosneft was a guarantee of its future expansion: the Kremlin’s support meant it was certain to pick up the rest of Yukos’s assets for a song in bankruptcy auctions to come.
But the IPO had in fact not really been an IPO at all. Instead, it was more like a private placement. Foreign oil majors including BP, Malaysia’s state oil company Petronas, and China National Petroleum Corporation, anxious to curry favour with the Kremlin, had bought up almost half the total offering, while KGB-connected Gazprombank bought $2.5 billion in shares.[57] It was widely reported that the Kremlin, which couldn’t allow the sale to fail, had pressed tycoons like Abramovich to take part in it. Abramovich was reported to have bought as much as $300 million worth of shares, a further indication that he was operating at the Kremlin’s behest.[58] BP had made no secret of the fact that it was seeking to use the offering to buy its way into the Kremlin’s favour, that it was an exercise in ‘relationship-building’. ‘We think it’s a good strategic investment for our position in Russia and our relationship with the Russian oil industry and with the Russian authorities,’ said a spokesman for the company.[59] But other investors complained that the sale was a typical KGB operation, while US investors and oil companies stayed away out of fear over the legal risks. ‘This was a major extortion exercise,’ said one fund manager, claiming that the sale was way overpriced. ‘They leant on investors in true KGB fashion to make sure the offering was successful.’[60]
But it seemed to matter little to investors that they were legitimising the state takeover by Putin’s KGB men. Nor did they appear concerned that the funds raised would bypass the Russian budget, going instead towards paying down the $7 billion loan a murky state special-purpose vehicle called Rosneftegaz had taken on from international banks when the state increased its stake in Gazprom the previous year. It was part of what former deputy energy minister Vladimir Milov called ‘a three-card monte trick’ aimed solely at avoiding the transparency normally required of state privatisations: ‘This is very characteristic of the current regime. They work through non-transparent schemes where Putin’s men are personally the beneficiaries and can divide the money between themselves without being accountable to anyone.’[61]
For Andrei Illarionov, the Kremlin economic adviser who by then had stepped down in disgust at the changes that were going on, the Rosneft sale was ‘a crime against the Russian state and the Russian people’.[62] In taking part in and facilitating it, he said, ‘Western companies are actually building long-term relations with those forces in Russia that are destroying the very pillars of modern society: a market economy, respect for private property, democracy.’[63] But for the KGB men behind Rosneft’s transformation, it was the stamp of approval they’d been working for, and allowed them to deepen their infiltration of international markets.
As Rosneft hoovered up Yukos’s remaining assets in bankruptcy sales, Western investors began to pile further into the Kremlin’s order. Two other behemoths of the Kremlin’s state-run system fast followed suit with equally enormous share offerings. But neither of them was a beacon of transparency. Rather they were representative of a fast-emerging system in which the Kremlin dominated everything. First there was an $8.8 billion offering in February 2007 by the state-owned savings bank Sberbank that drew in foreign and domestic investors alike.[64] Though investors worried about transparency, the bank was seen as a proxy for Russia’s booming consumer economy, and the state’s control of it was regarded as an advantage. It would never be allowed to fail. Then, just three months later, Russia’s second-largest bank, VTB, the former Soviet trade bank, also owned by the state, took itself to London for an $8.2 billion initial public offering, the world’s biggest that year.[65] VTB’s reputation as a pocket bank for Kremlin ‘special projects’ closely connected with the KGB did little to dampen investor enthusiasm. Its avuncular chief executive Andrei Kostin, a former Soviet diplomat in London, had displayed little talent as a banker apart from his ability to win billions of dollars for the bank in state support. Just two years before, a former central bank chairman had called VTB ‘a sinking Titanic’.[66] But when it listed that spring investor demand for shares was eight times the actual offering. 2007 was the year global investor interest was reaching its peak. Oil prices were nearing a record $70 per barrel, and even the chairman of Goldman Sachs, Lloyd Blankfein, a titan of Wall Street, wrote to Putin requesting a meeting – a fact that was proudly displayed on the Kremlin’s website for all to see.[67]
Enticed by the billions of dollars in deals that were sloshing around, global investment banks were piling back into Moscow – some for the first time since being burnt in the August 1998 crisis. Mergers and acquisitions in 2006 alone reached $71 billion.[68] But the tycoons the foreign investors partied with in Moscow’s increasingly upscale clubs and restaurants were by then often proxies for Kremlin interests. There was the forty-one-year-old Suleiman Kerimov, a quicksilver native of Dagestan, the volatile region neighbouring Chechnya. He’d first hit the headlines in 2006, when he wrapped his Ferrari around a tree on Nice’s Promenade des Anglais and nearly died from burns,[69] after which he retreated to the lowlit air-conditioned cool of his office on the top floor of a heavily guarded Moscow townhouse, his burned hands protected by thin fingerless gloves. Once he recovered he became notorious again for his lavish parties, where the likes of Beyoncé crooned to senior bankers from Morgan Stanley and Goldman Sachs at his villa in Cap d’Antibes. By early 2007 Forbes was estimating his fortune at $14.4 billion, making him Russia’s second-richest man after Abramovich.
Kerimov was part of a new generation of financial tycoons emerging out of Putin’s KGB capitalism whose fortunes were totally dependent on access to resources of the state.[70] If the nineties-era Yeltsin tycoons initially made their fortunes by holding the treasury accounts of the government in their banks before graduating to taking over the country’s biggest industrial assets, Kerimov’s wealth was almost entirely paper. In 2004 he had benefited from $3.2 billion in loans from Sberbank, which he used to build a 6 per cent stake in Sberbank itself, as well as a 4.2 per cent stake in Gazprom.[71] As the value of Sberbank soared tenfold and that of Gazprom sixfold, Kerimov’s fortune rapidly expanded to reach $17.5 billion. The globally-traded Gazprom and Sberbank stock enabled Kerimov to parlay his fortune into establishing ties deep in Western financial markets, building significant stakes in Morgan Stanley, Lehman Brothers, Fortis and Credit Suisse, among others.[72]
The problem was that no one was sure if the fortune he’d amassed could really be described as his own. Kerimov had always operated in a murky realm closely associated with the interests of Russia’s foreign-intelligence service.[73] Formerly he had been little-known, but now that he’d come out into the light, thanks to billions of dollars in loans from a state bank, even the Western bankers who worked with him weren’t exactly sure who they were dealing with. ‘There were times when I wondered whether he was a front for the Kremlin,’ said one.[74] ‘Nobody would be surprised if he was,’ said another.[75] ‘There is always speculation that he’s a custodian for Kremlin cash,’ said a third. ‘But how could you prove it? There is no real money, so there’s nothing to manage. It’s all leverage.’[76]
The fortunes being made under Putin were many times larger than those of the Yeltsin years, and the way the tycoons built their wealth was very different. Everything was dictated by the Kremlin. Opportunities in business hinged on Putin, to whom tycoons and their underlings referred in whispers as ‘the papa’, or ‘the number one’, pointing to the ceiling to indicate him. (Many were the meetings I went to where I’d be told to leave my phone on a desk outside the office of the person I was interviewing, such was the fear that everything was bugged.) At once fearing and revering Putin, they depended on his favour to win access to loans from state banks or to state contracts, by then the main ways of making money in Russia. It was a mafia system in which business was done on informal ‘understandings’ like those that ruled mafia groups. When the entire system was built on corruption, on kickbacks and access, every participant could be controlled. Putin and his men would have kompromat on everyone – from businessmen to state officials receiving bribes. It was a way to keep everyone on a hook, fully aware that at any time, if they stepped out of line, they could go to jail. State authority had turned into big business, and every government official was expected to use his position to earn cash, said two former Kremlin insiders.
Oleg Deripaska, a young metals tycoon who’d emerged at the top of the nation’s aluminium industry after vicious nineties-era battles for control, was the first to make a public nod to the changing climate. ‘If the state says we need to give it up, we’ll give it up,’ he told me in 2007, referring to his Rusal aluminium giant. ‘I don’t separate myself from the state. I have no other interests.’[77]
The dependency on Putin’s Kremlin became further entrenched when the 2008 financial crisis hit. The collapse of Lehman Brothers ricocheted through the Russian stock market, erasing $230 billion of its $300 billion value in September and October that year alone.[78] Russia’s billionaires had borrowed heavily from Western banks to fund the rapid expansion of their business empires. A practice known as margin lending had become widespread, whereby the tycoons would pledge stakes in their businesses as collateral for billions of dollars in loans. Now that the value of those shares was plummeting, the foreign banks were calling in the loans. Significant stakes in Deripaska’s Rusal and Mikhail Fridman’s Vimpelcom, the country’s second-largest mobile-phone operator, were in danger of being seized by Western banks.[79]
When Putin’s government stepped in to save the country’s billionaires, it didn’t renationalise their assets. A subtler game was afoot. Instead of seizing the shares for the state, state banks such as Sberbank, VTB and Vneshekonombank provided billions of dollars in bailout loans to the troubled tycoons, leaving them even more on the hook of the regime.[80] Countless others had been saved by the state banks agreeing to roll over billions of dollars in loans the businessmen owed them. ‘It was a very careful policy,’ said one tycoon who’d been saved in one of the state bailouts. ‘Putin wanted people to be grateful to him. He saved such big companies. If the government gave you $2 billion or $3 billion in loans, and then you get a call from the Kremlin saying please give $1 billion for a project, you can’t just reject it. You have to comply.’[81]
It became a cornerstone policy of the Putin regime. ‘Putin sees it this way,’ said the tycoon. ‘ “I gave you loans. You have to be loyal to me.” It’s a very oriental approach. It’s a feudal system.’ The circle of Kremlin custodians was expanding far beyond Putin’s St Petersburg allies.
*
For the Western bankers who’d been working so intently to integrate the Russian billionaires into the global economy, dependency on the Kremlin always seemed a secondary matter. They’d been blinded by the flood of cash flowing into the City of London from the former Soviet Union, and increasingly they’d come to depend on it, especially as the Western banking system hurtled towards the 2008 financial crisis. In those days, one senior Western banker told me how he and his colleagues would order due diligence reports on new clients that would conveniently self-destruct on their computers once they’d been read, erasing anything that might have rung alarm bells.[82] For good measure, a whole industry grew of corporate investigations firms producing background reports that conveniently whitewashed the colourful histories of Russian tycoons.
Data on the total inflows of Russian cash into London is scarce. Most of it comes into the City via offshore shell companies in the likes of Cyprus, the British Virgin Islands and Panama, or through the British Crown Dependencies of Jersey, Guernsey and the Isle of Man, all well-known for hiding beneficial ownership through layers of inscrutability. One of the Geneva money men described to me how most Russian clients first directed their funds into Cyprus or Austria, both of which had a treaty with Russia that prevented it from being taxed twice.[83] From there they would go to the UK, and then to an anonymous trust in Panama. This system exploited a loophole between the continental and Anglo-Saxon tax systems, which almost eliminated taxation altogether. Most of the cash flooding into London in the past ten years or more has been of unknown origin. As an example, in the second quarter of 2009 alone, the three Crown Dependencies brought in $332.5 billion in net financing to the City of London.[84] Much of that was believed to be foreign money, its initial origin impossible to identify. But London real-estate brokers were well aware that their biggest clients, splashing millions on the capital’s finest property, were from the former Soviet Union, while the city’s lawyers and bankers queued to service the billions of dollars at the command of the Russian tycoons. This money’s provenance, and who really controlled it, were of little concern.
The West hadn’t known then that, for instance, when Abramovich bought Chelsea he may have been acting on Kremlin orders. There was scant awareness that the British lords paid lavish salaries to sit on the boards of Russian companies had been granted little oversight of the corporate activities. ‘In London, money rules everything,’ said one Russian tycoon. ‘Anyone and anything can be bought. The Russians came to London to corrupt the UK political elite.’[85] ‘The Russians know very well how to play the game,’ said a former senior London banker with ties at the top of Kremlin power. ‘They manipulate lots of people with money. There are fifty people here I could name. What do you think all those lords are doing on the boards of Russian companies? They are being paid £500,000 a year.’[86]
As London became known as Londongrad, or Moskva-na-Thames (Moscow on the Thames), two of Russia’s richest billionaires, Roman Abramovich and Alisher Usmanov, an Uzbek-born metals tycoon whose business had always gone hand in hand with the Russian state, set up residence in the city and took prime positions in the top ten of the Sunday Times rich list. For one Russian tycoon, the process reminded him of an old Soviet anecdote from many years before.[87] In those days, when the Soviet Union was careening towards bankruptcy, the KGB was preparing to send an agent to the US. The agent had thought up an attractive cover story for himself: he would arrive in America as a rich man, with a fleet of yachts and a prestigious mansion. The whole of US high society would come to him. He’d told his KGB boss how effective this plan would be, and the chief wholeheartedly approved. But when it came to seeking approval from the KGB finance department, the concept had to be changed. The agent was told there was no money for such a scheme. Instead, he would have to head to the US as a homeless person without money. ‘This was the situation,’ the tycoon said. ‘And now the dream has come true. They have the big yachts and the private planes. And here they have their big houses. There is Chelsea Football Club. It’s not just Abramovich, but it’s a whole group that have descended into the West. The infiltration of the UK has succeeded.’