None of this would have mattered if the KGB men who ran Russia had sought to use the country’s wealth to strengthen market and democratic institutions, rather than to preserve and project their own power. It wouldn’t have been an issue had the hardcore siloviki around Putin seen the West as a possible partner, and not increasingly as the enemy, intent on weakening Russia as a global power.
But they came from a world where the Cold War had never really ended, where the only thing that mattered was restoring Russia’s geopolitical might. Theirs was a world in which, from the start of Russia’s transition to the market, factions of the KGB had seen capitalism as a tool for one day getting even with the West, a world in which Putin believed he could buy anyone. For Putin’s people, the encroachment of the West, through NATO, ever closer to Russia’s borders was an existential threat, while the democracy movements that overturned pro-Russian governments in Ukraine and Georgia were seen as US-funded revolutions, not as an expression of the people’s free will.
These paranoias were born of the collapse of empire, grounded in the bitter defeat of the Communist system. The problem was that they were held by a group of KGB men who became ever more ruthless in their pursuit of power.
Putin had staked out the position most clearly when he addressed world leaders for the first time at the annual Munich Security Conference in February 2007. Many believed this to be the final year of his presidency. He would soon reach the end of his second term, and according to the constitution he would have to step down. But he began right away with a combative warning that some might not like what he had to say. For the next twenty minutes he railed against the post-Cold War world order, where the US dominated as the sole superpower: ‘The United States has overstepped its borders in all spheres. It is imposing its will on other states in the economy, in politics and in the humanitarian sphere. And who likes this? Who likes it?’ he said.[1]
He attacked the expansion of NATO into the countries of the former Warsaw Pact. The West, he said, had ridden roughshod over guarantees it extended to the Soviet Union after the fall of the Berlin Wall. Most of all, he condemned American plans to build a missile-defence shield in Poland and the Czech Republic. The US claimed this was necessary to guard Europe against missiles from Iran and North Korea, but it was Russia’s long-held view that the shield could only be aimed at undermining Russia’s capacity for a nuclear strike. Neither North Korea nor Iran had the capacity to reach Europe, Russia believed, and even if North Korea did try to launch missiles targeting the US, it would not route them via Europe. ‘This is clearly against the laws of ballistics,’ said Putin. Building a missile-defence shield on Russia’s borders, he threatened, was only going to lead to a new arms race.
Putin’s tirade ended with a warning for the West. The Cold War had left behind a minefield that had yet to be cleared, he said. The ideological stereotypes, the double standards, the patterns of ‘bloc-thinking’ had all remained, while the unipolar world in which the US dominated everything was bound to fail: ‘This is a world of one master, one sovereign. And this in the end is ruinous not just for everyone who is part of this system but also for the sovereign itself – because it will destroy it from the inside.’ The world, he noted quietly, was changing rapidly. The so-called BRIC countries – the emerging markets of Brazil, Russia, India and China – were rising fast, and challenging the economies of the developed world.
But in those days the West had other troubles. It was still grappling with the hangover from the September 11 terrorist attacks, and its military incursions into Iraq and Afghanistan. The threat of terrorism still loomed large. The last thing it wanted to hear was an upstart Russia laying claim to a place at the top of the global security architecture. The firm belief was that those days were long over, and Russia was finished as a global power. This attitude was summed up succinctly by the US’s then defence secretary Robert Gates, who on hearing Putin’s speech sighed, ‘One Cold War was quite enough.’[2]
Instead, by the end of that year, the West was placing its hopes in the man Putin had anointed as his replacement as president: Dmitry Medvedev, the softly spoken, diminutive lawyer who’d served as his deputy since the St Petersburg days. With dark curly hair and a stilted, tightly-wound air, Medvedev was a self-proclaimed liberal. He’d grown up in a suburb of Leningrad as a bookish boy who queued for volumes of classic literature and underground recordings of Western rock music. The forty-one-year-old Medvedev had launched his presidential bid with a sweeping declaration that ‘Freedom is better than non-freedom,’ and pledged to cut back the role of the state in the economy. The West set store in the hope that with his presidency Russia would move back to the path towards becoming a normal market economy, and that the country’s further integration into the global system would help spur the development of a politically active middle class. Medvedev’s anointment was seen as an encouraging sign that the more liberal wing of Putin’s administration was ascendant, and that the worst excesses of the siloviki – including the takeover of the court system and the growing clampdown on political opposition – would be curbed. Russia, it was hoped, would follow the same rules as everyone else. Soon after the Obama administration took office in January 2009, the US announced a ‘reset’ in relations, even after Russia’s military conflict with its Western-leaning former Soviet neighbour Georgia in August 2008.
Early that month, fighting between the Georgian military and separatists in the breakaway republic of South Ossetia deploying heavy Russian weaponry had escalated into a five-day war. Georgian tanks bombarded the separatists, who were shelling Georgian villages, and then entered the regional capital, Tskhinvali, where dozens, perhaps hundreds, of civilians lost their lives.[3] Russia and Georgia blamed each other as the fighting spiralled out of control. Russian planes bombed the positions of Georgian troops, while Russian tanks moved into Georgian territory. The Georgian president, Mikheil Saakashvili, maintained that he ordered the assault on Tskhinvali only after he learned that Russian forces had invaded through the Roki tunnel from Russia to the north, while Russia claimed its forces only entered after the Georgian attack had begun. The truth seemed clouded in the fog of war. But several independent military experts believed Russia had long laid a trap for Saakashvili, deliberately escalating the separatists’ military action and planning the incursion well in advance.[4] The standoff led to a big chunk of territory being torn out of Georgia, and ended any hope it might have had of joining NATO, talks on membership having been held earlier that year. Russia unilaterally recognised South Ossetia’s independence, rendering it a zone of ‘frozen conflict’. Few were in any doubt that Russia’s aggressive response indicated a new assertiveness in seeking control of its near abroad. ‘Russia is claiming a whole new role, and it will have repercussions everywhere,’ said Dmitry Trenin, then a political analyst at the Moscow Carnegie Center. ‘Russia will start taking on the US around the world more actively. This attitude wasn’t there a month ago – we’re in a different environment now. Russia wants to assert regional hegemony.’[5]
Despite these aggressions, the new US administration of Barack Obama signalled that it wanted to start relations with Russia with a clean slate. There was to be an end to the bickering; instead the emphasis would be on engagement, cooperation and partnership. Medvedev had played a part in that, hailing Obama’s election as creating a ‘very good chance’ to build ‘good cooperative relations’,[6] and signalling Russia’s desire to further integrate into the global financial system, outlining a plan for reforming international financial markets: ‘Russia is ready to engage in efforts in full cooperation with EU member states and other partners and would like to participate in the creation of a new world financial architecture.’ One of the big themes of his presidency was a push to transform Moscow into an ‘international financial centre’. He offered to rein in plans to station nuclear-capable Iskander missiles in the Russian enclave of Kaliningrad, wedged between Poland and Lithuania, in response to the US missile-defence system.[7] For top US foreign policy strategists such as Strobe Talbott, the Clinton-era deputy secretary of state, the belief was that the global financial crisis had weakened Russia, rendering it no longer a danger as a ‘petro superpower’.[8] Talbott also believed in a future in which Russia’s integration further into the global system meant it would follow the ‘rule-based international order’.
What emerged was mutual back-slapping between Medvedev and Obama, who praised the Russian president as a ‘thoughtful, forward looking individual’.[9] Discussions were launched on a slowdown of the US’s missile-defence plans in return for Russian assistance in halting Iran’s capacity to build long-range missiles.[10] ‘Joint understandings’ were reached on cuts to both countries’ nuclear arsenals, and deals were made to strengthen cooperation in Afghanistan.[11] During Obama’s first visit to Moscow in 2009, he and Medvedev seemed to strike a rapport. And when Medvedev headed to the US for a reciprocal visit the following year, the focus was on deepening business ties. He sought to portray himself as a moderniser, an all-new iPad-twirling, tweeting Russian president. He made a point of visiting Silicon Valley, expressing hopes for cooperation that would help Russia’s efforts for high-tech development.[12] The bonhomie continued, with Obama and Medvedev visiting the US president’s favourite burger joint.[13] The US was investing heavily in Medvedev, in hopes he would lead Russia’s further integration.
But after stepping down as president, Putin had taken Medvedev’s place as prime minister, and behind the scenes he was mostly running the show. Medvedev took few decisions independently, and his reforms to try to roll back the role of the state in the economy were little more than window-dressing. In many ways, he was no more than a cipher. Putin had picked him as his successor precisely because, of all of his inner circle, he was the least likely ever to gain the stature to challenge him. From the start, the plan had been for Putin to return as president after Medvedev had served out a term. ‘You understand all this with Medvedev was based on finding a way for him to return,’ said Sergei Kolesnikov, the former physicist who’d been one of the Bank Rossiya-connected financiers of Putin’s regime.[14] One of Medvedev’s first actions as president was to extend the term of whoever succeeded him from four years to six, as if in preparation for Putin’s return.[15]
Instead of easing the political climate, the US’s attempts at cultivating Medvedev only deepened Putin’s suspicion of the West, and would later prompt a much stronger crackdown on dissent. When Putin announced in September 2011 that he was, after all, going to stand for re-election as president, the West’s hopes for its policy were dealt a near-fatal blow. The Medvedev experiment seemed over – if it had ever begun.
Still, for one moment that winter, it did look as if Russia could face a turning point as hopes that the Medvedev presidency might have made an impact were briefly revived. When Putin announced that he was returning to the presidency, for the first time since his vault to power, he faced a real political backlash. The signs that all was not well came soon after he made the announcement, when he was booed as he stepped into the ring to congratulate the winner of a televised wrestling match.[16] The whistles and jeers the crowd directed at him were the first he’d experienced in his near twelve years – eight as president and nearly four as prime minister – in power. Although the bout was being shown live, the editors at the state TV channel had been able to fade out the sound of the boos. But when, six weeks later, on December 10 2011, tens of thousands of protesters carrying placards calling for ‘Russia Without Putin’ headed to a small island on the Moscow river to demand an end to his regime, their shouts were much harder to edit out.
The demonstration that day was the biggest since the Soviet fall. As snow fell on Bolotnaya Square, the protesters, shouting slogans such as ‘Putin is a thief!’ and ‘The thief should sit in jail!’, were just the width of the river away from the Kremlin’s red walls. The most immediate cause of the demonstration was widespread vote fraud uncovered during the parliamentary elections the previous week.[17] Increasingly active members of Moscow’s civil society had caught the Kremlin red-handed, ballot-stuffing and falsifying results in favour of the United Russia party, which was by then widely disdained as a mass of grey bureaucrats whose loyalty to Putin’s state was driven by nothing other than corruption and a desire for personal advancement. But behind the cries of exasperation over the vote was a much deeper dissatisfaction, shared by those who’d jeered Putin at the wrestling match. People felt cheated by Putin’s return to power. Although most recognised Medvedev as part of his clan, four years of his more liberal rhetoric really had stirred hopes for a political thaw, in particular among Moscow’s urban elite. They felt mocked. Putin had kept the entire nation on tenterhooks over whether Medvedev might stay on for a second term, or he himself would return. But when he announced his decision at a party congress for United Russia in September, he indicated that he and Medvedev had decided it between themselves years before. It was as if Putin had come out and told them that everything they’d heard for four years had been a ruse. His decision ‘really really humiliated the country’, said Yevgenia Albats, editor of the The New Times, one of the few independent magazines critical of the Kremlin.
Bankers and businessmen joined pensioners and teenagers in outcry and disappointment, while left-wing anarchists mixed with liberals and ultranationalists. As the demonstrations continued deep into the Moscow winter, Russia’s opposition finally found a charismatic leader who united them for the first time since Boris Yeltsin had stood up against the Soviet system: Alexei Navalny, a likeable, slightly gangly thirty-five-year-old former lawyer, who had long been seeking a way into politics. He had gained a big internet following as an anti-corruption blogger during Medvedev’s presidency, and many believed he bore more than a passing resemblance to Yeltsin in his younger years. He’d been one of the few brave voices calling out the country’s biggest state corporations over contract-rigging and kickbacks. But during the protests that winter he took on the electrifying presence of a rock star, shouting, ‘Who is the power here? We are the power here!’ as the crowds roared the same words back at him. He made ardent speeches denouncing the corruption of the Putin regime, which he dubbed the rule of ‘swindlers and thieves’. As the protests continued past the New Year and into the presidential election season in March, talk even began of a battle between the more liberal and hard-line forces in the Kremlin.[18] For some of the more progressive members of Russian big business, news of Putin’s return had felt like a blow. ‘It’s like if one of your relatives is terminally ill,’ said one of them. ‘When they die, you knew it was going to happen, but it doesn’t stop you from grieving.’[19]
But though for a time the frenzied atmosphere that winter made it feel that there was hope for a political spring, in reality the protesters never stood a chance. They were a small urban minority, while Putin’s KGB men controlled the whole of law enforcement. Putin had appealed to the Russian heartland, to the country’s so-called ‘silent majority’, the blue-collar workers who prized stability above all else and still lauded Putin for ending the chaos that had marred the Yeltsin years. And Putin, most of all, couldn’t believe that the wave of protests was a genuine outpouring of frustration and disappointment that all Medvedev’s promises for greater openness had turned out to be no more than a charade. Instead, he saw the hand of the US State Department. How else, he thought, could it have been possible that crowds of nearly 100,000 had marched in protest? For Putin, if before the US had sought to stoke uprisings in Ukraine and Georgia, now it was interfering in Russia itself.
‘We will not allow anyone to interfere in our internal affairs!’ he told a stadium packed for a presidential election rally in February. ‘We will not allow anyone to force their will upon us, because we have our own will … We are a victorious people! It is in our genetic code. It is transferred from generation to generation, and we will have victory!’[20]
This was a message that resonated with most of the population, still aggrieved by the collapse of the Soviet empire and just as deeply suspicious of the West. It helped Putin win re-election with 64 per cent of the vote.[21] But when on election night he took to the stage to declare victory to supporters massed outside the Kremlin, Putin couldn’t help but shed a few tears. Though aides claimed it was only the wind, it was as if he was haunted by the spectre of the Arab Spring that had toppled authoritarian regimes across the Middle East in 2010 and 2011. The Kremlin had been as convinced of the US’s hand in sponsoring those pro-democracy movements as it was of its presence in the Moscow protests. (It probably hadn’t helped that John McCain, the Republican senator and arch Putin critic, had taunted him that winter in a tweet: ‘Dear Vlad, the Arab Spring is coming to a neighbourhood near you.’[22]) It seemed he was caught up in the emotion of his own self-declared battle to reassert Russia’s global position, as if he truly believed he’d succeeded in defeating a US plot.
From the moment Putin returned as president, a political clampdown began that underlined the powerlessness of Russia’s liberal elite. First, in June, on the eve of Putin’s inauguration, dozens of protesters taking part in a demonstration that turned violent were arrested and jailed, charged with participating in mass riots and attacking police. Then, the homes of opposition leaders including Navalny were raided and searched, while a month later Navalny was charged with large-scale embezzlement, which carried a penalty of up to ten years’ imprisonment.[23] There was a new law that imposed significant restrictions on any non-governmental organisations receiving foreign funding. The impact was chilling. Instead of any loosening of control of the political system under Medvedev’s much-promised thaw, Putin’s KGB men had maintained – and strengthened – their grip on power. They still controlled the court system and the whole of law enforcement. They could jail anyone who crossed their path. Even if they’d wanted to, Russia’s Yeltsin-era tycoons couldn’t resist the country’s new trajectory. They were too deeply invested. ‘All of them depend on the number one,’ said a close associate of one of them. ‘Russia is the only place they make money. So they all depend on Putin’s nod for that.’[24] ‘How can we work against them, when they have all the power?’ said one of the billionaires.[25]
And instead of Medvedev’s vaunted liberalisation, what emerged from his four-year rule was in fact a system under which the state’s grip on the economy was stronger than before. This was not just because of the state bailouts that saved the tycoons from Western creditors following the 2008 financial crisis, but also because under Medvedev’s presidency billions of government dollars were poured into flagship state projects in the name of modernising the economy. First there was Rosnano, a corporation created as an incubator for developing nanotechnology, a field Putin’s men had identified as being crucial in competing with Western advances in military technology and artificial intelligence. There was Skolkovo, a high-tech hub created by Medvedev in 2010 aimed at stimulating the development of tech startups. Both ventures turned into enormous black holes for government money, with little oversight over or transparency about how it was spent. When Rosnano invested more than $1 billion in US tech firms and Skolkovo deepened its cooperation in Silicon Valley and with the Massachusetts Institute of Technology, US law enforcement became concerned that Russia was reverting to the old ways of the Cold War. The FBI warned tech leaders in Boston that in reality the Russian state projects were sophisticated fronts aimed at accessing American dual-use and military technology.[26]
The rapprochement with the US under Medvedev’s presidency, and the steady inflow of Western investment it encouraged, had only helped support the KGB men’s grip on power. ‘The West was very naïve,’ said Lilia Shevtsova, a political analyst with Chatham House. The assistance given by the Obama regime was like financial and technological ‘Viagra’ for Putin’s existing system, she said.[27] Resurgent oil prices had provided additional support. By the time Putin returned to the presidency they had soared to nearly $100 per barrel, almost three times the $35 that accompanied the 2008 financial collapse. Russia’s hard-currency reserves were back at more than $500 billion, the world’s fourth biggest.
The feudal system under which wealth depended on Kremlin favours had only deepened. Despite all Medvedev’s talk of cracking down on corruption, two senior western bankers claimed several billionaires acted as fronts for him, while at least one tycoon devised a deal which both needed Kremlin approval and sought to make sure Medvedev would get a cut. Medvedev has previously dismissed corruption claims. Even as he preached about reducing the state role in the economy, the wealth held by Putin’s closest business allies surged.[28]
*
While the fortunes of Putin’s KGB cohort were rising, men like Sergei Pugachev were on the outs. Pugachev had become an anachronism, a symbol of a different era, of the Yeltsin years and the transition to Putin, when business was much more free. Following the attack on Khodorkovsky, Pugachev had gradually been sidelined. ‘After this takeover of power by the KGB I couldn’t influence things any more,’ he said.[29] ‘They’d taken over like a tsunami.’ Some time in Putin’s second term, he let go of his office in the Kremlin. He didn’t seem to need it any more, and it felt too conspicuous. He’d remained close to some degree with Putin, helping organise a vacation for him and Prince Albert of Monaco in the summer of 2007 in the Siberian wilderness of Tuva, the region near the border with Mongolia which Pugachev represented as senator. There, surrounded by the splendour of the Siberian mountains, the two men fished in the Yenesei river and Putin, famously, first posed topless, portraying himself as a macho hero dressed only in green khaki trousers and wielding a fishing rod.
But Pugachev had been unable to kowtow to Putin like the yes-men around him. Always irreverent, he’d often told him what he thought. There’d always been a friction between them, as if Putin resented knowing he was in debt to Pugachev for helping bring him to power. And gradually the friction grew. Even before the financial crisis hit and Medvedev was anointed Putin’s successor as president, clouds had been gathering over Pugachev’s business empire, which spanned the country’s two largest shipyards in St Petersburg, a vast coking-coal deposit in Siberia and property development.
Pugachev had resigned as chairman of Mezhprombank soon after Putin came to the presidency in 2001, handing over its ownership to a New Zealand trust. But despite his personal irreverence towards Putin, Pugachev had financed anything he asked him to. He’d still been known as the Kremlin’s banker.[30]
In the first year of Medvedev’s presidency, Putin asked Pugachev to finance the rise of another tycoon, considered more loyal and closer to Putin. As Russia headed towards the global financial crisis in 2008, tycoons with access to cash were becoming harder to come by. But Pugachev was still among them. In the summer of 2008 he received a call from Putin asking him to stump up $500 million in loans to help out his friend Arkady Rotenberg. ‘He told me, “It’s only a loan. It will be paid back to you in six months,”’ said Pugachev.[31] Pugachev met often that year with Rotenberg, who’d grown up with Putin scrapping on the streets of Leningrad, and then training together at the same judo gym. Although Rotenberg’s business interests had grown after Putin took the presidency, establishing with his brother Boris a bank in St Petersburg called SMP, he wasn’t widely known. But Pugachev was helping groom him to expand the role of his bank as another financier of the Putin regime, while Rotenberg was in line for a deal that would grant him billions of dollars in state contracts. That spring Rotenberg acquired a series of construction companies from Gazprom,[32] and just weeks later Gazprom awarded the holding company Rotenberg had created, Stroigazmontazh, a multi-billion-dollar pipeline contract to build the Russian part of a major new strategic gas pipeline under the Baltic Sea to Germany.[33] The only problem was that by summer Rotenberg still hadn’t been able to come up with the cash to pay Gazprom for the construction companies.[34] It was then that Putin called Pugachev, who said he’d readily assisted. But Putin’s direct interest in the matter made it clear to Pugachev who was really behind Rotenberg’s construction business. ‘Putin wanted to bring Rotenberg in because he really could control him,’ said Pugachev. ‘He was absolutely his.’ Unlike Putin’s other business allies from St Petersburg, ‘Rotenberg had no real business before then.’[35] The deal transformed Rotenberg into a billionaire. Rotenberg has denied his rising fortune had anything to do with his friendship with Putin. But he fast joined the ranks of Timchenko, Sechin and Kovalchuk as one of the close Putin allies taking over ever greater swathes of the Russian economy.[36]
This was the final favour Pugachev did for Putin before he was suddenly thrown out in the cold. When the financial crisis ripped through Russia’s banking system just months after he lent Rotenberg the money, Mezhprombank, which he co-founded (but claimed no longer to be a direct owner of) was left, like many other Russian banks, deeply in the red. But compared to other over-leveraged banks, the central bank was less keen to roll over or restructure bailout loans issued to it as life support. At first it had stepped in swiftly, as it had across the entire crisis-hit Russian banking system, providing $2.1 billion in bailout loans to keep Mezhprombank afloat.[37] But by summer 2010, when Mezhprombank had still not paid down the central bank’s support, the outstanding debt became a mechanism by means of which Putin’s government sought to seize control of Pugachev’s two shipyards, Northern Shipyard and Baltisky Zavod.
Despite the enthusiastic noises being made by Medvedev about cutting back the state’s role in the economy, Putin wanted to create a state shipbuilding corporation that would be chaired by Igor Sechin, the close KGB ally who’d engineered the state’s attack on Yukos. Pugachev’s shipyards, located across the wharf from the St Petersburg sea port, were to be crucial assets. Northern Shipyard and Baltisky Zavod were Russia’s biggest military shipyards, the producer of the Russian navy’s military frigates and corvette-class warships. Pugachev had invested heavily in modernising production, and the shipyards were the leading contenders to win a groundbreaking contract between Russia and the French defence ministry to build two of France’s Mistral-class warships for the Russian navy. When Putin visited the yards for the first time, for the launch of Russia’s first nuclear icebreaker, the Fifty Years of Victory, he couldn’t believe his eyes. ‘I remember his amazement,’ said Pugachev. ‘There was a swimming pool, gardens, an orangery on board. This was an icebreaker worth more than $1 billion. But for him, it was incomprehensible. In his view, a private owner can make buns, but he can’t make icebreakers and military ships. It was as if Putin had understood for the first time what Pugachev did. ‘It didn’t suit Putin that I owned a military shipbuilder. He didn’t consider I should own it. He is a Soviet person, a Chekist. I think he decided then he would take it from me.’[38]
When Putin called Pugachev for a meeting in November 2009 and told him the government was going to create a state shipping corporation, Pugachev immediately understood his shipyard business was up. Putin told him Sechin was to chair it. ‘He told me, “Look, you will have big problems with him. Don’t you want to sell?”’ But in those days, Pugachev believed he could reach agreement. The shipyards were worth a lot. They had tens of billions of dollars’ worth of government contracts. He asked for $10 billion. But after some negotiation he was told by the finance minister Alexei Kudrin that the government could pay $5 billion, no more. Pugachev had agreed.
But somewhere along the way, he said, Sechin decided he wanted to take the yards for a fraction of their value. It was the year after the crisis, and the newly created state shipping corporation didn’t have any cash. Even though Pugachev claimed he no longer had anything to do with the management of Mezhprombank, he said he agreed to hand over his stakes in the shipyards as collateral for the central bank’s $2.1 billion in bailout loans. The independent auditors BDO had valued them at $3.5 billion, while the Japanese investment bank Nomura had put them at between $2.2 billion and $4.2 billion. Their sale should have raised more than enough to cover the debt.[39]
But instead of continuing with preparations for the sale, in October 2010 the central bank suddenly revoked Mezhprombank’s licence after it missed an interest payment. It then filed suit to seize the shipyard stakes, triggering a chain of events that led to their forced sale in 2012. The proceedings followed the same route as the forced Yukos sales. A Moscow court agreed behind closed doors to the sale of Northern and Baltisky for a fraction of their value – they went to Sechin’s state-controlled United Shipbuilding Corporation for $415 million and just $7.5 million respectively.[40]
Instead of raising enough funds to pay down Mezhprombank’s debts, the state had acquired Pugachev’s shipyards for a minute fraction of their value. Once again, the court system had been tightly controlled to acquire strategic assets for Putin’s men. ‘When they revoked Mezhprombank’s licence this had become a raid on my business, and then anything was possible,’ said Pugachev.[41] As if open season had been declared on him, Pugachev was soon facing the expropriation of the rest of his assets. His property project at 5 Red Square, one of Moscow’s most prestigious landmarks, which Putin had assigned him the rights to develop years earlier, was simply transferred back to the Kremlin Property Department without any compensation at all. Then, rivals moved in on EPK, the coking-coal company he’d created. Although Pugachev believed he’d reached agreement to sell it to a consortium led by Ruslan Baisarov, a close ally of the Chechen president for $4 billion (the buyers had even announced the deal in the Russian press), once he’d sold the first tranche of the company for $150 million, the Russian government revoked EPK’s licence to develop the vast Elegestskoye coking-coal field, and granted it to a new company owned by Baisarov.
Even as Medvedev was preaching the need to reduce the state’s grip on the economy and calling for law enforcement to stop ‘nightmaring’ business, Putin and Sechin had launched an elaborately coordinated attack.[42] It was an example of how sophisticated Putin’s state takeovers had become. Instead of raising enough funds to pay down Mezhprombank’s debt to the central bank through the sale of the shipyards, Pugachev was blamed for the collapse of the bank. Soon he was facing criminal investigation alleging that he had caused Mezhprombank’s bankruptcy when he transferred $700 million of his own funds from an account he held at the bank into a Swiss account at the height of the crisis in 2008.[43]
The man who’d manoeuvred to bring Putin to the Kremlin had become expendable. Pugachev no longer fitted the regime’s objectives; he was no longer judged to be sufficiently loyal. The KGB had listened and watched as he met Yumashev, Pyotr Aven, Finance Minister Alexei Kudrin and the heads of Russia’s biggest state banks in the dining room of his Moscow office. They’d heard his irreverent tone in discussing Putin and how the system now worked. ‘He was a victim of his own tongue,’ said another tycoon.[44] Most of all, KGB hard-liners had disapproved of Pugachev’s efforts to gain citizenship in France, where he’d kept a villa since the early nineties, and where he was later to flee.
*
When we met, it was already September 2014 and we were sitting in Pugachev’s office in Knightsbridge, the wealthy area of London which had become a playground for Russia’s rich. Next door was the Mandarin Oriental, a palatial hotel where two years before Igor Sechin, by then renowned as the hard man of the Kremlin, had delivered his first speech to global investors on the eve of Rosneft’s latest incursion into what remained of Russia’s privately-owned oil sector. Across the road was the leafy Lowndes Square, where Roman Abramovich had bought up two stucco mansions around the corner from London’s two most exclusive shopping emporiums, Harrods and Harvey Nichols. A little further away on Eaton Square was the $25 million residence of Oleg Deripaska, the metals tycoon who’d married the daughter of Yeltsin’s son-in-law, Valentin Yumashev, and then publicly pledged his loyalty to Putin’s state. Pugachev said he wished he’d never rented an office there. ‘It’s disgusting,’ he said. The concentration of Russian cash in the square mile around him was a bitter reminder of how deep Russia’s reach into the London elite had become.
By then Pugachev was battling an order freezing his assets issued by London’s High Court as the Kremlin expanded its legal campaign against him. It didn’t seem to matter that of the two main witnesses against him, one of them, Mezhprombank’s former president, had completely disappeared, while the other, the bank’s former chief executive Alexander Didenko, had done a deal with prosecutors by which, in return for testifying against Pugachev, his own sentence would be cut. (Later Didenko would get a job with a bank run by the same Russian government agency targeting Pugachev.) The Kremlin was pursuing Pugachev over the $700 million transfer, but Pugachev could only see the case as part of the Putin regime’s broader campaign to take over his business empire. Boxes of documents on the government’s actions against him included a note from Sechin discussing how to take over the shipyards that had been copied to the FSB, the prosecutor’s investigative committee and the Moscow arbitration court, naming the precise criminal case to be opened against Pugachev.[45]
As Sechin’s note shows, the Kremlin was not above issuing direct instructions to the country’s law enforcement in order to seize an asset. But seizing an asset was not always the best way to truly build state power – or an effective economy. As Putin’s men extended their reach, the Russian economy began stalling. After Sechin’s shipbuilding corporation took over Pugachev’s shipyards, production of warships there came to a halt.[46] One by one, the new management were arrested on charges of corruption and embezzlement as infighting over cash flows escalated.[47] And after the Chechen president’s ally Ruslan Baisarov took over the coking-coal project that belonged to EPK, all development ended. When it was owned by Pugachev, production was at ten million tonnes, and work on plans for a $1.5 billion railroad from the coalfield to China were proceeding at full pace. Now it wasn’t producing at all.
The same thing was happening at Sechin’s Rosneft. After the state oil giant took over Yuganskneftegaz at the end of 2004, output mostly flatlined. Rosneft’s production growth was based almost entirely on its acquisition spree, while its debt soared beyond $80 billion.[48] Executives would complain in private about how Sechin would seek to involve himself in every decision, down to signing off on management’s business trips.
All of this pointed to a broader problem. The economic growth of Putin’s first two terms in power, which had rebounded briefly following the crisis during the Medvedev years, was starting to sputter. In Putin’s first two terms, surging oil prices had fuelled average growth of 6.6 per cent, but in 2013 it was slowing to 1.3 per cent, and many economists were forecasting a recession. The Putin regime’s original sin – the subversion of the judicial system to secure the takeover of Yukos – had finally caught up with it. Fear of raids by the authorities had stymied investment. Putin’s men were abusing the legal system to take over businesses with impunity, and the state behemoths they were building were becoming so large they didn’t know what to do with them. ‘The Yukos case was an additional impulse for corruption in the law-enforcement agencies,’ said one former senior Kremlin official. ‘After this, they began to expand as they understood they had carte blanche to actively encroach into the economy. Everyone was frightened, and they cut back investments.’
The economic woes were also eating into Putin’s ratings, which were flagging at 47 per cent, the lowest since he became president.[49] His regime seemed to be on a road to nowhere, and the only way to kickstart growth would have been to launch reforms to unpick the state takeover of the economy – and the power of Putin’s circle – which was stifling initiative. Only corruption flourished.
But by the time Pugachev and I were sitting in his Knightsbridge office trying to figure out how things had got so far, instead of tackling the economic problems, Putin had dramatically changed the narrative. Gone were the nagging worries about the economy and his own sagging popularity that had dogged most of the first two years after his return to the presidency. The fear of protests had totally evaporated.
Instead, Putin was staking everything on a new phase in Russia’s imperial revival. He’d launched a huge gambit to reassert the country’s place in the global order. That March, Russia had annexed Crimea, the Ukrainian peninsula on the Black Sea coast where Russia had long kept a naval base. For the first time since the end of the Cold War, Russia had invaded and taken over another country’s territory, instantly plunging the Putin regime into a deepening standoff with the West.
In London, the Western bankers who’d assisted what they believed was Russia’s global integration were struggling to understand how it had all gone wrong. Events seemed to have spiralled out of control. But parts of the military action appeared to unfold with precision. Few had doubted that Russia and the West had long been on a collision course over Ukraine’s future – either close to the European Union or in Russia’s common Eurasian economic space. But had Putin, as one senior Western banker suggested, ‘dusted off a plan’? ‘He had to do something to get himself on the front foot. The only way he could boost the economy would have been to decentralise power. But when push came to shove, the need to control and the need to stay in power got the better of him … What we’re seeing now seems part of an age-old strategy to deflect from problems and mobilise support.’[50] Could Russia’s own economic difficulties have made Putin’s men all the more determined to dominate Ukraine, setting off the crisis that led to Crimea’s annexation? When and how did it begin?
*
The first time the Kremlin signalled that Russia could be heading towards a deep conflict with Ukraine came much earlier, in September 2013. By that time the pro-Kremlin Viktor Yanukovych had – with the help of Firtash and Paul Manafort – vaulted to the Ukrainian presidency, after the Orange Revolution coalition and Yushchenko’s presidency had foundered as a result of conflict and corruption allegations following the 2006 gas deal. Yanukovych had been gaining in independence and wealth since he came to power in 2010. Despite his pro-Kremlin leanings, encouraged by other independent-minded Ukrainian oligarchs, he’d been holding talks on signing a trade and cooperation agreement with the EU that would strengthen Ukraine’s political and economic ties with the West. These talks revived an age-old bugbear for Russia, and they couldn’t have come at a more sensitive moment. Any Westward move by Ukraine, especially so soon after the political backlash that greeted Putin’s return, posed a serious threat to Putin’s KGB men. It threatened the entire model of Russia’s statist development under Putin, and was likely to strengthen the resolve of his liberal opponents. Yanukovych was due to sign the EU deal that November, and as the date neared, Putin’s regime began piling pressure on him. That September, a firebrand Kremlin envoy, Sergei Glazyev, publicly warned that Ukraine faced catastrophe if it signed the deal, as Russia would impose punitive tariffs that would cost it billions of dollars and could lead to default on $15 billion in loans.[51] What’s more, Glazyev raged even more ominously, it could lead to the collapse of the Ukrainian state, as Russia would no longer be obliged to observe a treaty delineating its border with Russia. The Kremlin could intervene if pro-Russian regions in Ukraine appealed directly to Moscow. ‘Signing this treaty will lead to political and social unrest,’ said Glazyev. ‘The living standard will decline dramatically … there will be chaos.’[52]
Yanukovych had taken Glazyev’s threats so seriously that he suddenly backed off that November from signing the agreement with the EU. But though events would take a very different course, Glazyev’s warning of Russian action was to prove chillingly prescient. Yanukovych’s step back ignited a powderkeg. Long-cherished expectations that Ukraine was finally on a Westward tilt were shattered all over again, kindling pro-EU protests that spiralled into hundreds of thousands of people taking to the streets. Students, backed by Ukrainian oligarchs fed up with the craven corruption of the Yanukovych regime, once again set up a tent city on Kiev’s symbolic Maidan Square, site of the 2004 pro-Western uprising that led to the Orange Revolution.[53] For almost three months a core group of protesters stuck it out through the ice and snow, from time to time clashing with riot police as the administration sought to clear the square. Violence escalated when Yanukovych imposed draconian legislation banning demonstrations and threatening protesters with heavy fines and jail sentences.[54] Protesters seized buses in defiance, setting one on fire and driving others into columns of riot police. Some tore down metal fences and used the bars as weapons against the police. The protesters were being infiltrated by a radical right-wing force that was becoming more and more organised, led by nationalist groups who manned the barricades surrounding the square. Armed even with catapults, they were on the front lines of clashes with riot police.[55] The protests seemed within a knife-edge of spinning out of control. And then, one day, they did.
Early in the morning of February 20 2014, sniper fire rang out. To this day, no one knows precisely how it started, or where the first shots came from. Within two hours, forty-six protesters were dead.[56] By the end of the day the death toll had reached seventy, and Yanukovych was in crisis talks for his political survival with the French, German and Polish foreign ministers. The negotiations ended with the Ukrainian leader agreeing to call presidential elections before the year was out, and to change the country’s constitution to curb presidential powers. But still Russia was ratcheting up the rhetoric. One senior Russian government official told the Financial Times that day that if Ukraine continued on a Western tilt, Russia was ready to go to war over Crimea to protect its military base there and the ethnic Russian population: ‘We will not allow Europe and the US to take Ukraine from us,’ a foreign policy official said. They think Russia is still as weak as in the early nineties, but we are not.’
The world woke on February 22 to the news that Yanukovych had fled in the middle of the night, deserting his administration despite the agreements he’d seemed to reach on stepping down early from power. It seemed he believed he was no longer safe. His presidential guard had abandoned him, and the more radical leaders of the opposition had refused to recognise his compromise deal, pledging to continue the protests till he was gone. In the vacuum, a temporary pro-EU government took power.
But in less than a week, the apparent breakthrough for Ukraine took a new turn. Russia had made good on its threats. Before dawn broke on February 27, masked troops wearing no military insignia stormed the Crimean parliament, hoisting a Russian flag over the Soviet-era building, while an emergency session named a new regional prime minister and called for a referendum on joining Russia.[57] Meanwhile, 150,000 Russian troops massed near the Ukrainian border. Events were unfolding with incredible speed, almost exactly as Glazyev had warned. Later, Western officials wondered at how meticulously prepared the operation seemed.[58]
The West was reeling from the audacious actions of the Putin regime. Russia justified them by claiming that it had been forced to react to protect its interests in response to a US-backed coup in Kiev. ‘We are witnessing a huge geopolitical game in which the aim is the destruction of Russia as a geopolitical opponent of the US or of the global financial oligarchy,’ said Vladimir Yakunin, a close Putin KGB ally since the St Petersburg days. America, he told me when we met in the midst of the military tension, was continuing to follow a doctrine that the CIA had been pursuing ever since the sixties – the separation of Ukraine from Russia.[59] The former US national security adviser Zbigniew Brzezinski had written in 1996 that with Ukraine Russia was a great power, but without it, it was not: ‘This was not a new idea,’ said Yakunin. ‘More than forty years ago, when the US developed plans for the destruction of the Soviet Union, CIA documents said it should be accompanied by the separation of Ukraine from Russia. Somewhere on the shelves of the CIA’s leaders there are such files with these projects, and they activate them maybe every three years.’[60]
Without ever offering any proof or evidence, Russian officials and state media launched an unprecedented propaganda campaign claiming the US was behind the protests that had buffeted Yanukovych’s regime. ‘Neo-Nazis’ had led the protests, they said – despite the fact that the vast majority of the protesters were the same Western-leaning educated Ukrainians who’d led the Orange Revolution in 2004, while most of the Ukrainian elite was fed up with the corruption that had distinguished the Yanukovych regime.[61] According to the Russians, it was neo-Nazi ‘armed fighters’ who’d fired the shots on the fateful day in February that left more than seventy dead on Maidan Square.[62] No mention was made of the fact that members of the Berkut, a unit of the Ukrainian security forces who’d manned the protest barricades that day, had then mostly fled to Russia or Russian-controlled parts of Ukraine, their weapons later being found at the bottom of a lake.[63] The Berkut had been notoriously infiltrated by Russian agents, especially during Yanukovych’s rule; later, Ukrainian prosecutors would allege that Russian security services were involved in the killings.[64] Following a forensic investigation of video footage, the prosecutors accused an elite squadron of the Berkut, clad in black, of killing thirty-nine of the protesters. An official from the prosecutors’ office and a source in the Ukrainian security service told the Financial Times that an unidentified force had sparked the gunfire by firing at both protesters and police from rooftops surrounding Maidan Square.[65]
But none of this fitted with the Russian propaganda that was saturating the airwaves. When Yanukovych fled two days after the shootings, again, according to the Russian state propaganda, it was because of the US-backed coup, and nothing to do with the fact that his own security detail had deserted him.
Russian officials insisted that the final straw that had spurred them to action had come when the Ukrainian parliament hurriedly repealed a 2012 language law that had improved the rights of Russian-speakers in Ukraine.[66] But the hastily assembled Western-leaning new Ukrainian government had swiftly conceded that this was a mistake, and had vetoed the move. The Russian campaign, however, carried on regardless.
When I met Yakunin, Putin was ratcheting up the tension still further by calling for the deployment of Russian troops in Ukraine. Yakunin said he hoped this threat was ‘a cold shower’ for Western leaders: ‘It would be great if they understood it is not decent to stamp around in your boots in someone else’s house.’
The rhetoric, and the state propaganda that accompanied the military action, appeared to reflect the deep paranoia that had haunted Putin and his men since the days of the Orange Revolution in 2004, and from long before when Putin had watched the Soviet empire crumble around him from his perch in the KGB villa overlooking the river Elbe in Dresden, that they were surrounded by a Western plot to undermine Russia’s power. But it also seemed no more than a feint to justify the Kremlin’s actions. It was as if all the talk of Russia’s global integration, the need to bring in foreign direct investment, to modernise the economy and reach accommodation with the US, had been cast aside, and Putin’s regime had suddenly shown its true face. One former aide to the last Soviet leader, Mikhail Gorbachev, said the atmosphere in those days was as if someone had flung open the cellar doors of the Kremlin and the ghosts and the stench of the Soviet past had come flying out.[67]
For Putin, Crimea’s annexation was the moment to triumphantly declare a new post-Cold War world order, the moment when Russia defiantly began to turn the tables on the US, refusing to bow to its dominance. After Crimea voted overwhelmingly in favour of joining Russia, Putin was greeted by a rapturous standing ovation from officials gathered under the vaulting arches and golden chandeliers of the Kremlin’s Georgievsky Hall to hear him speak. ‘What happened in Ukraine reflects the situation that unfolded across the entire world,’ he said. ‘After the world of two superpowers broke down, the US decided it could use strongarm politics. They think they have been entrusted by God.’[68] The West had been trying to corner and contain Russia for centuries, he told them. ‘But everything has its limits … If you press the spring too hard, it will spring back … Russia, just like any other country, has national interests which you need to respect.’[69]
By the end of his speech, some officials were wiping tears of pride from their eyes, while others chanted ‘Russia! Russia!’ Putin was tapping into a deep-seated longing for the glory days of the Soviet imperial past that was shared by many Russians. It was the same nostalgic longing that had helped elect him – as the kandidat-resident, the KGB man in the Kremlin – three times. Only now, in many Russians’ eyes, it was finally being acted on. Crimea had been lost many years before the collapse of the Soviet empire, in 1954, when Nikita Khrushchev, then Communist Party leader, signed it over to Ukraine. But most Russians blamed Boris Yeltsin for confirming it when, with the stroke of a pen in December 1991, he and the leaders of the other Soviet republics signed the Soviet Union out of existence, leaving Crimea firmly within Ukraine’s borders.
When the Soviet Union collapsed and Crimea wound up in a different country, ‘Russia felt that it had not just been robbed, it had been pillaged,’ Putin told the officials gathered that day. ‘Millions of Russians went to bed in one country and woke up across a border; in one moment they became minorities in former Soviet republics … But then Russia just dropped its head and swallowed the shame.’[70]
Now that he was taking steps for the first time to restore Russian empire, Putin’s popularity surged to more than 80 per cent. He’d never had to demonstrate any proof of US involvement in the popular uprising against Yanukovych – the propaganda chimed too well with a population still convinced of Russia’s humiliation following the Soviet collapse. It was enough to show pictures of US assistant secretary of state Victoria Nuland handing out cookies to pro-European demonstrators in the freezing cold on Kiev’s Maidan Square. Later, the propaganda grew increasingly sophisticated. Cyber units working for Russia’s military-intelligence agency, GRU, flooded Facebook and a Russian social media network with fake stories that justified Russia’s invasion and condemned the revolution as being led by neo-Nazis, while Ukraine had become a hotbed for Chechen terrorists.[71] When the conflict spread into east Ukraine, Russian TV broadcast allegations that the Ukrainian army had launched a ‘genocide’, even reporting that soldiers had crucified a three-year-old child.[72] Slowly, the constant barrage brainwashed most.
The West was having to wake up to Russia’s assertiveness in a way it hadn’t during Moscow’s brief victorious war against Georgia in 2008. The fear was that Russia’s proxy war could spread into Europe. No one understood how far Putin would go. His manoeuvring in Ukraine called ‘the whole of the peaceful European order into question’, said German chancellor Angela Merkel.[73]
Across Europe and the US, governments were scrambling to find a response. When the Kremlin pressed ahead in March with holding a referendum in Crimea on its accession into Russia, the US government fired back with economic sanctions that targeted Putin’s innermost circle. The twenty Russians facing asset freezes and visa bans included senior figures in the administration such as Sergei Ivanov, who’d served as defence minister and now as Putin’s chief of staff, and Viktor Ivanov, the mustachioed former deputy chief of staff, another former KGB ally from St Petersburg who now served on the Russian Security Council, and the head of the military-intelligence service, Igor Sergun.[74] It also blacklisted the allies who’d become well-known as Putin’s closest business partners, the trusted custodians in the system of Kremlin fronts: Gunvor oil trader Gennady Timchenko, Bank Rossiya’s main shareholder Yury Kovalchuk, and Arkady Rotenberg, Putin’s former judo partner to whom Pugachev had lent $500 million only four years before to set him up as a contractor for Gazprom with billions of dollars in deals.
For the first time, the US government was naming and shaming these men as Putin’s cashiers. Putin, it said, ‘has investments in Gunvor and may have access to Gunvor funds’, while Kovalchuk was ‘the personal banker for senior officials of the Russian Federation including Putin’.[75] Rotenberg, it continued, had benefited from billions of dollars in state contracts, including most recently $7 billion in construction projects for the 2014 Sochi Winter Olympics. The US government was going public with the system of Putin’s closest front men. A senior administration official said they would be unable to access any US financial services, and would find it difficult to transact in the dollar: ‘These individuals will find their ability to continue to act in the world economy in any fashion severely constrained.’[76]
The European Union also sanctioned members of the Russian parliament, and the recently installed Russian leaders of Crimea – and then, to add insult to injury, Europe joined the US in suspending Russia from the G8 group of developed nations, whose membership the country had so keenly sought as a sign of its integration into the global economy. But, after fearing even tougher economic measures, similar to those that had crippled the Iranian economy, the Russian stock market soon rebounded, and Russian troops, undeterred, continued to mass near the Ukrainian border.
The conflict escalated. Proxy fighters – who Russia insisted were ‘volunteers’ – began heading into east Ukraine, where they joined with a considerable contingent of local pro-Russian militants equipped with Russian military hardware. By April they were taking over administrations in the east Ukrainian regions of Donetsk, Lugansk and, for a while, Sloviansk.[77] To Western governments and the Ukrainian administration, the situation looked remarkably similar to the way in which unidentified Russian units had taken over and annexed Crimea.
The threat of much harsher economic sanctions averted a full-scale invasion into east Ukraine. But what unfurled instead was a hybrid war in which Russia’s proxies battled Ukraine’s ragtag army as the Kiev government struggled to fight back against the incursion into its territory. The Russian troops still stationed in the tens of thousands on the border acted as a form of psychological warfare to intimidate the Ukrainian army, while Russian heavy weaponry and so-called ‘Russian volunteers’ continued to slip into east Ukraine unchecked.[78]
In July the US and the EU struck back with more sanctions in an attempt to force Russia to back off. This time the US targeted the biggest Russian state companies, cutting off the titans of the state banking sector – including Andrei Akimov’s Gazprombank, Andrei Kostin’s VTB and Vneshekonombank – from accessing long-term US financing.[79] It also blacklisted Russia’s prized state oil champion, Rosneft, as well as Timchenko’s gas producer, Novatek, limiting their ability to access funds. The EU followed two weeks later with similar measures. The standoff had been exacerbated still further by the downing on 17 July of a Malaysia Airlines passenger plane as it crossed the territory held by the pro-Russian separatists, killing all 298 people on board.[80]
As Russia continued to fuel the proxy war that was devastating east Ukraine, slowly Western governments began to wake up to the understanding that the hopeful policy they’d pursued ever since the Soviet collapse – that Russia would inevitably converge with the Western world – was no more than an illusion.[81] They were having to contend with a regime that appeared to be aggressively pursuing its interests regardless of the consequences for its standing with the West. Putin’s was a regime for which the restoration of the country’s global position was the only priority. Russia didn’t wish to be part of the Western-dominated order. It wanted to set its own rules instead.
It was becoming clear to the West that this was a regime of many masks that would resort to subterfuge to get its way. The tactic had finally become obvious when Putin first denied that Russian troops were in Crimea, and then, once the process of annexation was completed, admitted that the unidentified troops who became known as ‘little green men’ were Russian after all. It was a regime for which the pursuit of empire was becoming all-consuming, no matter what sanctions the Western world threw in its way. By the time a tentative ceasefire was reached in September 2015, Russia’s proxy war had claimed more than eight thousand lives, while the pro-Russian separatist strongholds in Donetsk and Lugansk remained in place.[82] Russia had succeeded in splitting Ukraine, and despite the so-called ceasefire, to this day sporadic fighting continues, with 13,000 now dead, more than a quarter of them civilians.[83]
We may never know exactly how it all started, who it was who fired the first shot. But it seems Russia had long been preparing for several contingencies. If the revanche was in any way planned, the groundwork had been laid down long before – in the days when the KGB had quietly plotted its survival through the preservation of networks and friendly firms, siphoning cash in the final years before the Soviet fall. The process had been strengthened when Putin took over the presidency, enabling the KGB men to take over strategic cash flows, beginning with Yukos and then stretching into the rest of the economy.
If any of the Yeltsin-era oligarchs were still in any doubt about whether they could act independently, they were given the final signal soon after the annexation of Crimea. Then even one of the most loyal tycoons, Vladimir Yevtushenkov, was forced to hand over his Bashneft oil major to the state. He was arrested, and his controlling stake in Bashneft was first nationalised and then taken over by Sechin’s Rosneft.
It was a sign that Russia’s market economy was no more than a simulation. Instead, behind the scenes there was an incessant sharing of revenue streams. Funds were to be funnelled into the common Kremlin cash box, the obschak, and every deal, almost no matter how small, had to be agreed with the number one. ‘Yevtushenkov thought that Bashneft was his and that he’d paid money for it,’ said a senior Kremlin official. ‘But it turned out that it wasn’t his, and that at any second it could be taken from him. For Russian business, it is absolutely clear today that the Kremlin can take everything from any one of them. Property in Russia today is not sacred, especially property won in the nineties. It is only defended by Putin’s authority.’[84]
The Russian economy was now on a war footing, with everything subsumed to the Kremlin’s will, said Pugachev: ‘Now there is only Putin and his lieutenants who carry out his orders. All cash generated is put on the balance of Putin. The country is in a state of war. Big business cannot live as before. It has to live under military rules.’[85]
Almost the entire economy was now at Putin’s command to deploy as he saw fit. ‘It’s all Putin’s money,’ said one senior banker with connections to the security services. ‘When he came to power, he started out saying he was no more than the hired manager. But then he became the controlling shareholder of all of Russia. First they gave him a stake and then he took control. It’s a shareholder company of the closed type.’[86] ‘Putin is the tsar, the emperor of all the lands,’ agreed another tycoon.[87]
For one of Putin’s closest allies, Vladimir Yakunin, the former KGB officer who’d been one of the first shareholders of Bank Rossiya and who now served as head of Russian Railways, being on the US sanctions list was a badge of honour. But as far as he was concerned, the US government was behind the times in claiming that only Timchenko and Kovalchuk were cashiers for Putin: ‘The Russian president has access to the funds of the entire country,’ he said.[88]
It was a sentiment echoed in warning by another close former partner of Timchenko. When we met one rainy day in November 2014, he warned me that the US sanctions might be too little too late. By then a vast web of money men and tycoons were acting as proxies for the Putin regime. ‘You’d have to sanction every one of them,’ he said.[89]
Though the rouble plummeted in December 2014 under pressure from the sanctions and the lack of refinancing for Russian corporate debt, ultimately the country’s economy was proving resilient. The government had suspended the rules of the normal market economy. State banks did not call in loans when Russian companies broke their terms. Most debts were rolled over and restructured, part of an endless refinancing pyramid. The government dug into part of the stabilisation fund it had been collecting from windfall oil revenues for most of the previous decade to bail out the state-linked companies in most need of refinancing. Most of all, one Russian financier smiled to me, the West had underestimated the extent of the informal Russian economy: the vast web of slush funds that were off-book and unrecorded in official GDP figures that contained large pools of cash.
While the West continued to threaten further sanctions unless Russia agreed a ceasefire, Putin demanded a rewriting of the rules of the global security architecture, giving Russia a more prominent role. Angela Merkel walked out of one set of talks, declaring that Putin was out of touch with reality.[90] But for Putin’s former economic adviser Andrei Illarionov, it was the West that was out of touch: ‘People in the West think Putin is irrational or crazy. In fact, he’s very rational according to his own logic, and very well-prepared.’[91]
The signs of the power of the Russian cash that had poured into Europe over the past decade were becoming visible in the rifts that appeared between the countries of the European Union over how far economic sanctions should go. In the UK, a Foreign Office official was photographed with a briefing paper arguing that Britain must not ‘close London’s financial centre to Russians’, while a law firm lobby group warned of the potential impact to London’s status as a centre for settling legal disputes.[92]
For Pugachev, the danger was clear. The system of black cash to corrupt and buy off officials had long gone beyond the first custodians of the Putin regime, beyond Timchenko, Kovalchuk and Rotenberg, and had extended to all the Russian billionaires who acted as fronts at the Kremlin’s command. ‘They all get calls to send money for this and for that. They all say, “We’ll give it. What else do you need?” This is the system. It all depends on the first person, because he has unlimited power. All are ready to work under those rules. And those who aren’t are either in jail or abroad.’[93]
If the Soviet Union had run influence operations deep into the Middle East and Africa, now Putin’s KGB capitalism had penetrated deep into Europe. ‘This black cash is like a dirty atomic bomb,’ said Pugachev. ‘In some ways it’s there, in some ways it’s not. Nowadays it’s much harder to trace.’[94]
For the Ukrainian government, what the Kremlin was doing to their country was a warning that Russia could seek to expand its activities into disrupting and dividing the West. ‘Russia is trying to create turbulence in the EU through supporting far-right political movements,’ said Ukraine’s Western-leaning prime minister Arseny Yatsenyuk in early 2015. ‘This is a copycat case of what they did in Ukraine.’[95]