CHAPTER 2

PUTIN AND THE OLIGARCHS

How Putin Used the Soviet Playbook
and Weaponized Energy Deals

“We destroyed everything, all our communications, our lists of contacts and our agents’ networks. I personally burned a huge amount of material. We burned so much stuff that the furnace burst. We burned papers night and day…. The materials were destroyed or sent into the archives. Amen!” 1

Vladimir V. Putin, 2000
(on his final days as a KGB officer in East Germany)

“Russian Nuclear Energy Conquers the World,” exclaimed the Pravda headline on January 22, 2013. The former Soviet propaganda rag celebrated Russian President Vladimir Putin’s latest coup.2

The Russian atomic energy agency, Rosatom, had just taken full control of a Canadian company called Uranium One Incorporated. Uranium One had a substantial mining portfolio with assets stretching from the United States to Kazakhstan. The takeover brought Putin closer to achieving his goal of owning the largest nuclear company in the world and controlling much of the global uranium supply chain.3

Putin achieved this nuclear coup after years of aboveboard lobbying efforts and through surreptitious influence operations.4 The Uranium One purchase was a blatant muscle-flex by a man who likes to play with tigers, swim with dolphins, and ride bare-chested on horseback through Siberia.5

Putin had set his sights on global nuclear domination before President Barack Obama took office and then, just two days after Obama’s second inauguration, Putin had achieved a near virtual monopoly (producing more uranium than all American miners combined).6 In a single purchase, he had gained full control of one of the world’s largest uranium mining companies and a nuclear foothold in the land of his greatest adversary.

Uranium One was headquartered in Canada but mined uranium all over the world. The uranium mines in Kazakhstan were Uranium One’s crown jewels, and Putin had been eyeing them for nearly a decade.7 The mines in Wyoming, Texas, and Utah were prized too, but Putin had other, more sinister plans for Uranium One’s American assets.8

Russia and the Soviet Union before it had mined the other precious yellow metal for nearly as long as the Americans had—more than fifty years.9 Uranium is well known for its use in nuclear bombs due to its ability to create an explosive chain reaction of devastating power. But it is also used for civilian energy generation and medical purposes. Once uranium ore is extracted from the ground, it is refined into a commercial product known as yellowcake powder. Yellowcake is then enriched to varying levels depending on the end use: low enriched uranium (LEU) for civilian purposes and highly enriched uranium (HEU) for weapons.10

The Pravda article detailing Russia’s nuclear conquest was not just propaganda. Rosatom had already doubled its nuclear fuel sales and shown “impressive results, conquering new markets and penetrating into the markets of competitors.” The advantages that Rosatom had over its American, French, and Canadian competitors were significant.11

In 2012 alone, Rosatom’s portfolio grew by more than $18 billion. American companies like Westinghouse and Honeywell, French company AREVA, and Canadian company Cameco could not compete with Rosatom’s variety of products and services, which included mining and enrichment services, power plant construction, and operation.12

Rosatom, which Putin had launched in 2007 through a massive restructuring of Russia’s many nuclear assets, had the full backing of the Kremlin. Rosatom was neither a federal agency nor a private corporation. It was a public-private hybrid entity.13

As a quasi-state-owned enterprise, Rosatom enjoyed advantages that its Western competitors did not: its expenditures were subsidized, its profits were privatized, and its losses were socialized.

Putin’s nuclear powerhouse basically had a blank checkbook from the Kremlin while retaining the autonomy and privacy of a corporation. As such, Rosatom dominated the entire nuclear fuel cycle in ways no private competitor could dream of doing.14

Western competitors at this time were suffering from “Fukushima syndrome,” and their governments placed nuclear projects on hold. Putin doubled down on nuclear energy and sent Rosatom on a buying spree. Acquisitions like Uranium One were just part of Putin’s strategy—the supply side. He also dominated the demand side by building nuclear power plants, particularly in regions fraught with controversy.15

Crucial to Putin’s nuclear strategy was the development of Iran’s Bushehr reactor, a project that previous American administrations had deemed unacceptable. Putin completed the construction of the Bushehr reactor in 2012, all with U.S. President Obama’s blessing (despite hard evidence that Iran was secretly continuing an illegal nuclear weapons program).16

Putin’s strategy was to create new customers for Rosatom in China and Venezuela as well. In addition to his desire for nuclear partnerships with brutal, anti-American dictators like Iran’s Hassan Rouhani, China’s Hu Jintao, and Venezuela’s Hugo Chavez, Putin even worked with Syria’s Bashar al-Assad on developing Syria’s nuclear program.17

Despite these troublesome dealings with American adversaries, Putin was able to convince the Obama administration that Russia was America’s friend. Putin was somehow able to extract concessions from Obama for both Russia and Putin’s friends in Iran and Syria.18

Not only did Putin win considerable nuclear concessions from Obama (Uranium One, the 123 Agreement, New START, and other nuclear agreements), he also got help from Obama in the military space as well—particularly bolstering Russia’s cyber capabilities.19

The potential damage to America’s national security as a result of Obama’s “Russian reset” was incalculable.20

Putin’s successful cornering of the global uranium market was entirely predictable, driven by his quest to restore the Russian empire and turn the post-Soviet rubble into a great power. It was the culmination of his entire career, which has made him a highly disciplined, focused wielder of power.21

The untold tale behind that story is one that involves not just the Russian president, but also a current and a former American president, and the candidate who wanted to be the successor.

Putin’s Rise to Power

On New Year’s Eve, 1999—the day before Y2K—men, women, and children around the world waited nervously, counting down to the digital apocalypse. But not Vladimir Putin. For Putin, December 31, 1999, was the day he seized full control of one of the largest atomic arsenals in the world, thanks to his appointment from the outgoing President Boris Yeltsin. The nuclear button, quite literally, was finally within Putin’s reach.22

Growing up in the city known in the Soviet Union as Leningrad, Vladimir Vladimirovich Putin had wanted to be a spy since he was a teenager. In 1968, while patriotic Czechs led the unsuccessful “Prague Spring” uprising against the Soviets, the young Vladimir was captivated by the KGB heroes in the new Soviet spy thriller movie, The Shield and the Sword.23

At almost sixteen and still in high school, Putin showed up at the door of KGB headquarters in his hometown. He was initially turned away by KGB officers for lack of experience, but walked away with the hope that his chances of being accepted might increase if he were to go to law school. He was warned not to contact the agency again, but he did not have to: a KGB recruiter came to him about seven years later.24

Against his parents’ wishes, Putin enrolled in Leningrad State University’s law school in 1970. As he was finishing his studies, the KGB recruited him. Putin was officially a KGB asset from 1975 until August 1991, when he retired with the rank of lieutenant colonel.25

From 1975 until the early 1980s, Putin spent his time spying on foreigners for the KGB. Sometime after 1980, Putin was “summoned to Moscow…to attend the elite [Soviet] foreign intelligence training institute.”26

He did well. Putin was promoted to director of a Soviet-German friendship society in the KGB station in communist East Germany beginning in 1985. Operating from Dresden, Putin worked with Matthias Warnig, a comrade spy working for the East German secret police (or “Stasi”). Both Warnig and Putin worked in counterintelligence. One of Putin’s final KGB assignments in Dresden was recruiting Westerners.27

In the tense days after the fall of the Berlin Wall, crowds surrounded Putin’s office in Dresden. Putin recalled going outside to try to calm the rioting crowds and to prevent looters from ransacking his office, thereby “saving the lives of the [double-agents] whose files were lying on my desk.” Putin said he and his KGB comrades “burned so much stuff that the furnace exploded.”28

The Cold War had, by 1991, crushed Russia. Defeated militarily and depressed economically, the former empire was in shambles. Compounding the misery, the First Chechen War broke out between November and December 1994 and, on New Year’s Eve, Yeltsin’s forces stormed Grozny, the capital city of Chechnya.29

The brutality and bloodshed that followed was described as an “unimaginable catastrophe” by international monitors, and even former Soviet leader Mikhail Gorbachev called the conflict a “disgraceful, bloody adventure.” Amid the post-Soviet chaos, Putin’s spy craft evolved into statecraft.30

When Putin returned to his hometown in 1990, he was still a KGB officer, waiting like so many others for his next assignment in the “active reserves.” The Leningrad he returned to was a very different place: an absolute free-for-all was underway, and the city soon changed its name to St. Petersburg. So much money and natural resources were leaving the country that a complete accounting would prove impossible.31

By some estimates, the outflow of raw materials alone included “60 tons of gold, 8 [tons] of platinum, 150 [tons] of silver,” as well as an immense amount of oil, believed to be worth “between $15 billion and $50 billion.”32

For an ambitious and well-traveled KGB officer like Putin, opportunities were ripe for the plucking.

Mayor Anatoly Sobchak became Putin’s mentor and a ticket to the summit of power. While working in the St. Petersburg mayor’s office, Putin took full advantage of the position “as he rose through the ranks.”33

Putin and his cronies would steal and launder enormous sums of public money out of St. Petersburg, through Germany and other countries via questionable energy and real estate deals.34

In 1996, Sobchak lost his mayoral reelection after his opponent received powerful support from Moscow.35 Shortly after Sobchak’s defeat, Putin was “rather harshly” evicted from his plush office, and Sobchak fled the country.36

For Putin, it was only a temporary setback. He retreated, too, but not so far away. Putin moved out of the city to his lake-front dacha (or “mansion”) on the shores of Lake Komsomol’skoye. Putin allegedly acquired the lakefront estate by evicting the local villagers. An investigation found that “the person who bought the land, scared the local residents, burning down their little houses if they refused to sell them, was a St. Petersburg officer who turned out to be none other than Vladimir Vladimirovich Putin.”37

It was here that the soon-to-be notorious Ozero (translates to “lake”) Cooperative was headquartered. Putin’s neighbors built their palatial dachas around him. They were his cronies from St. Petersburg, including at least one member who was linked to Russian organized crime.38

Security for the ritzy, lakefront Ozero neighborhood was reportedly provided by a company called Rif-Security, which was run by a well-known mafioso named Vladimir Barsukov (the alleged head of the Tambov gang and sometimes called Kumarin) and Ozero’s leader Vladimir Smirnov.39

It is perhaps no surprise that former spies and Russian mafia operators found each other and built alliances. During Russia’s chaotic transition toward capitalism, KGB veterans and organized crime lords shared two crucial advantages over other Russians: they had business experience, and they were risk-takers. These qualities helped turn these otherwise unremarkable men into billionaires, almost overnight.

Soon Putin’s social circle would fill with notorious oligarchs. Together, they would plunder their country’s resources. Before Putin’s kleptocracy could be fully realized, there was another setback: Putin’s lakeside dacha burned to the ground in August 1996.40

Putin admitted later he was able to “force” his contractors to rebuild the Ozero dacha “even better” than the original.41

Putin’s retreat did not last long. He had signed on to work for President Boris Yeltsin’s 1996 re-election campaign, and following Yeltsin’s victory, Putin moved to Moscow. He soon found himself in the good graces of the Russian president.42

Putin’s success under Yeltsin catapulted his career—and spread his reputation as someone willing to sacrifice anyone and anything to attain power.

One of Putin’s many strengths is his ability to use tragic events to his best advantage. As he had done with his burned dacha, Putin would find a way to come back stronger. Like the famous Slavic legend of the firebird, time and again, Putin rose from the ashes in a way that can only be described as meteoric.43 His new boss, Boris Yeltsin, would not be so lucky.

The First Chechen War had been a disaster, draining economic and military resources, as thousands of Russian troops and tens of thousands of civilians perished in the conflict.44

The fledgling Russian economy was also in tatters, and its transition to some form of market economy was agonizingly slow. Into these challenges jumped a young reformer named Anatoly Chubais with a scheme to hasten this transition by privatizing state-owned property.45

Chubais’ early privatization efforts attracted both wealthy investors and average citizens who were looking to participate in Russia’s new capitalist experiment.46 But the program would wipe out middle-class savings while foreign investors and emerging Russian oligarchs (dubbed “the kleptocrats”) seized billions. Chubais allegedly allowed his cronies to unfairly acquire Russia’s prized assets.47

One of Chubais’ first efforts in 1995 was a creative auction program called “Loans for Shares.” This program was the primary scheme that created many of the first post-Soviet oligarchs.48

As Harvard economics professor Marshall Goldman explained it, Loans for Shares was how “[Mikhail] Khodorkovsky got a 78 percent share of ownership in Yukos, worth about $5 billion, for a mere $310 million, and how Boris Berezovsky got Sibneft, another oil giant, worth $3 billion, for about $100 million.” As ordinary Russians suffered in the turbulent economy, Chubais came under fire from Yeltsin’s nationalist opposition, who viewed his auctions as more corruption and kleptocracy.49

The new Russian oligarchs weren’t the only ones who capitalized on Chubais’ privatization schemes. Billionaire financier George Soros saw the potential as well. The man who had previously made a fortune speculating on the British pound and was commonly referred to as “the man who broke the Bank of England” invested at least $2.5 billion during the Russian privatization era.50

Soros and Harvard University’s endowment management company were the only foreign investors allowed to invest in Chubais’ Loans for Shares program in 1995, and both quickly became top shareholders in Russia’s second-largest steel mill, an oil company with reserves that rivaled Mobil, and Russia’s growing bond market.51

In 1997, a Soros-led consortium snapped up a 25 percent stake in one of Russia’s largest telecom companies, a move he would soon regret. At the time, Soros praised Russia for “moving away from robber-baron capitalism to a law-abiding capitalism where shareholders rights are protected.” Later he declared it “the worst investment” of his career.52

Chubais had become a darling of Western officials and investors who celebrated the capitalist feeding frenzy, but Russians soon grew tired of his schemes. Yeltsin became critical of Chubais and sacked the young reformer in January 1996. “How those auctions were fouled up,” Yeltsin moaned, “[o]ur enterprises were sold for next to nothing!”53

Shortly after he fired Chubais in an official capacity, though, Yeltsin (who needed all the help he could get) quietly rehired “the reformist” to manage the 1996 reelection campaign.

Despite rapidly sinking approval ratings, Yeltsin’s alliance with Western leaders like President Clinton kept him afloat. In 1996, Clinton deployed a battalion of his own closest veteran political advisors, like Dick Morris and Richard Dresner, to help keep Yeltsin in office. When accusations of American meddling went public, Yeltsin’s team implied that Clinton’s political consultants had limited or no contact with Chubais or other top Yeltsin campaign officials since “when all the real decisions were made, they were not present.”54

Indeed, while Clinton’s political strategists did help the Yeltsin campaign with polling and research, “it was money that tipped the balance.”55

Clinton, with the help of British Prime Minister John Major, French President Jacques Chirac, and German Chancellor Helmut Kohl, pressured the IMF to provide Yeltsin with more than $10 billion in loans. Critics claimed that the Americans, British, French, and Germans had effectively meddled in the 1996 election in an attempt to keep communist Gennady Zyuganov from winning, and destroying their capitalist dealings.56

During Yeltsin’s two terms in office, the IMF would provide around $40 billion in loans to Russia. Like other untold billions in Russia, much of the IMF money simply vanished.

At least some of the missing IMF money is believed to have made its way into Yeltsin’s campaign coffers. Russian presidential candidates’ private financing is capped at $2.9 million. Yeltsin campaign officials admitted they spent at least $100 million. His opponents believe it was actually anywhere from $500 million to more than $2 billion.57

Yeltsin’s emissary to the IMF was none other than Anatoly Chubais. During the 1996 campaign, Chubais was excoriated by Russian media when two associates were arrested carrying boxes filled with $538,000 in cash out of the main Kremlin office.58 Chubais later acknowledged that Russia had taken advantage of the IMF and other Western lenders, stating that “we conned them out of $20 billion.”59

Yeltsin won reelection with 53.8 percent of the vote despite single-digit poll numbers in the months before the election. Critics claimed that the election was rigged, and the Russian economy still stagnated despite the billions from the IMF. 60

His so-called “reformers,” Prime Minister (PM) Sergei Kiriyenko and Vice Premier and financial guru Chubais, among others, came under fire after their privatization schemes built an über-wealthy oligarch class while ordinary Russians suffered.61

The missing IMF money did not entirely thwart the reformist’s career trajectory—quite the opposite. Chubais was named “Finance Minister of the Year” by the Western magazine Euromoney in 1997. In March 1998, Yeltsin promoted Kiriyenko from minister of energy to PM (replacing longtime PM Viktor Chernomyrdin).62

In August 1998, the massive debts Russia had racked up finally caught up with them and the market crashed—almost overnight. Yeltsin had no choice but to fire his entire cabinet, including Chubais and Kiriyenko.63

All in all, it was a year of turmoil for Yeltsin before he eventually settled on a PM of his liking in August 1999: a relative unknown named Vladimir Putin.64

Putin’s Rise to the Presidency

In July 1998, Yeltsin installed Putin as the new head of the Federal Security Service (FSB), the successor to the KGB.65 Putin swiftly restructured the entire organization and installed his old KGB comrades and friends from St. Petersburg. He also eliminated two crucial directorates that were tasked with investigating white-collar financial crimes—the kind that implicated oligarchs and members of the Yeltsin family.66

Putin’s loyalists—Sergey Chemezov, Sergey Ivanov, and Nikolai Patrushev, among others—were placed in charge of various subagencies within the new FSB. Later, when Putin became president, Chemezov, Ivanov, and Patrushev were put in charge of Russia’s intelligence and military-industrial complex.67

Details of Putin’s rapid rise to Yeltsin’s inner circle are hazy. Given the KGB’s intense secrecy, this is no surprise. A senior fellow at the conservative Cato Institute named Andrei Illarionov was once Putin’s chief economic advisor but was dismissed in 2005 for criticizing the administration’s policies. Illarionov had a falling out with Putin and his crew of ex-KGB spooks whom he now calls “Siloviki Incorporated.” According to Illarionov, Putin’s SI operates under a strict code: they always take care of their own and abide by “the custom of omertà” (the mafia code of silence).68

Just a few short months after Putin took control of the FSB, his first major scandal occurred. In November 1998, Boris Berezovsky, a renowned oligarch from Yeltsin’s inner circle, wrote an open letter in Kommersant accusing a faction within the FSB of conspiring to assassinate him.69

Lieutenant Colonel Alexander Litvinenko alleged that he and other FSB operatives in charge of combating organized crime groups (an alleged “death squad” unit known as “URPO”) were tasked with carrying out the hit. Litvinenko was close to the oligarch, having worked for him as a bodyguard in the past. Litvinenko admitted that he warned his former boss, Berezovsky, of the sinister plot and later held a press conference that blasted Putin’s predecessors at the FSB. This appears to be the first time Litvinenko dared to expose top-level corruption within the FSB. It would not be the last.70

After the news died down, Putin personally and publicly demonstrated his loyalty to the powerful oligarch by showing up uninvited to Berezovsky’s birthday party in February 1999. At that time, Berezovsky had been implicated in the notorious $10 billion Bank of New York (BNY) money-laundering scandal. Prosecutors were out for blood.71

Then-PM Yevgeny Primakov was on a corruption crusade against Berezovsky and “the [Yeltsin] Family.” Primakov reportedly did not like Putin and fought the latter’s appointment “from the very beginning.” At the birthday party, Putin reportedly told Berezovsky that he “[didn’t] care what Primakov thinks,” and signaled loyalty to the oligarch over PM Primakov. Putin’s shrewd support for Berezovsky must have been substantial as it became mutual and further fueled Putin’s rise.72

The Russian economy began to collapse in the summer of 1998. Meanwhile, Putin restructured the FSB to serve his and his friends’ interests. Putin’s boss, Yeltsin, the so-called reformers, and Yeltsin’s cronies—”the oligarchs”—were deemed total failures. But Putin had been just far enough away at the FSB to avoid being blamed.

Against this unruly backdrop, Yeltsin promoted Putin to prime minister—the second most powerful position in Russia. Putin was Yeltsin’s fifth PM in less than a year and was narrowly confirmed by the Duma on August 16, 1999.73

Despite the fact that Putin was a political novice, Yeltsin praised his “vast experience” and promised that Putin would enact reforms if elected to be his successor. Putin soon converted the Russian public’s outrage over the corruption and chaos during the Yeltsin era into a new and even more powerful motivator: fear.74

However, despite Yeltsin’s backing, Putin had minimal support in the polls (under 2 percent) at the time of his appointment. Almost immediately (and perhaps not coincidentally), Putin had the benefit of a political distraction when an army of approximately two thousand misfits—comprising Chechen rebels, Arab mujahideen, and Wahhabi fighters—invaded Chechnya’s neighbor, Dagestan. Putin saw opportunity in the chaos.75

Within weeks of Putin taking over as Yeltsin’s prime minister, Russia entered the Second Chechen War.76

The conflict had been stoked, in large part, by a series of bombings that rocked Russia between August 31 and September 16, 1999.77

One of the first bombs targeted Russian military barracks in Dagestan on September 4, 1999. Dozens of Russian soldiers and their family members were killed. An Islamic Chechen separatist initially claimed responsibility (but later retracted), kicking off a Kremlin narrative blaming Chechen terrorists for each of the acts that followed.78

The Dagestan bombing struck a military target out of sight and out of mind of most Russian citizens. The next bomb struck at the very heart of Russia. Less than a week after the Dagestan barracks bombing, an eight-story apartment building in Moscow was blown to rubble, killing more than a hundred men, women, and children in their sleep. The Kremlin almost immediately declared it a Chechen terrorist attack.79

Moscow and other major cities were thrown into hysteria overnight. Virtually everywhere was on high alert. On September 13 just past 5:00 a.m., another bomb struck a separate apartment building, killing 118 Muscovites. Three hours before that blast, Russian authorities had responded to a call to investigate suspicious activity at the apartment, but somehow they overlooked the enormous bomb placed in the basement.80

Adding to the confusion, the head of Russia’s lower parliament mistakenly reported to his fellow Duma members that a bomb had struck an apartment in the city of Volgodonsk. The misinformation appeared to be an honest mistake. Or it was prescient. On September 16, a real bomb in Volgodonsk killed eighteen more apartment dwellers. The bombings began to reek of a conspiracy.81

On September 22, residents of an apartment building in Ryazan, a city southeast of Moscow, were horrified when they witnessed three individuals deposit three large bags in the basement and quickly speed away. When the police arrived, they reportedly found the bags filled with explosives.82

A manhunt began throughout Ryazan. When the culprits were apprehended, they shockingly produced FSB credentials, usually a badge known as a vezdekhod, which permitted FSB agents to go anywhere, public or private, and do anything. FSB headquarters called the local authorities and asked them to release the operatives.83

The events that followed raised suspicions that Putin and his KGB-turned-FSB apparatchiks had perpetrated a “false-flag attack” on Russian civilians.84

Less than two days after that incident, new FSB director Nikolai Patrushev gave a press conference claiming that the whole thing had been a misunderstanding. There were no explosives. In fact, he said, it was all an FSB “training exercise.” Residents were supposed to ignore the fact that local authorities had performed a chemical analysis proving the bags were filled with a powerful explosive called RDX.85

The Ryazan incident marked the end of the bombing spree, but by that point the death toll had topped two hundred and thousands more were injured. Russian citizens were sufficiently terrified.86

Whatever doubts were held about the official Kremlin narrative and “training exercises” were suppressed, and calls for retaliation against Chechnya reached a fever pitch. By the end of September 1999, PM Putin had become the face of the war effort.87

Within hours of the Ryazan incident, the Russian air force carpet bombed the Chechen capital of Grozny. Putin’s scorched-earth campaign forced hundreds of thousands of civilians—more than half the population—to flee Chechnya as refugees to neighboring republics. Grozny was destroyed; witnesses compared the scene to the atomic destruction of Hiroshima.88

Regardless of who was really to blame for the bombings, the Russian people had been craving a decisive and fearless leader, and that is exactly what Putin offered. The Yeltsin era was marred by uncertainty, misery, economic desperation (exacerbated by external and internal plunder of state resources), and overall weakness.89

In his book Deception, Edward Lucas describes how the Russian people yearn for the respect their country once had:

They mourn the Soviet Union’s power, not its politics. They recall growing up in a great country—a superpower—defined by the size of its nuclear arsenal, its global reach, and its wartime sacrifice. In their lifetime, all that disappeared. The Soviet system became the butt of jokes—for the senility of its gerontocratic leadership, for the poor quality of its consumer goods and for the omnipresent shortages. What came next was worse: the humiliating retreat from the old empire, the acceptance of German reunification on the West’s terms, and playing second fiddle to America in global politics…. Their driving concern now is to restore Russia’s standing in the world, and to prevent the West from ever again exploiting its weakness.90

Handed another pile of rubble, Putin seized the day and used it to his advantage. Yeltsin would resign by year’s end.

By early 2000, Putin was completely in control. He brought the Chechen separatists to their knees and established control over Chechnya, appointing the pro-Russian Akhmad Kadyrov as ruler of the Chechen government in June 2000. Even so, terrorist acts, suicide bombings, and skirmishes would continue—including the assassination of President Kadyrov in 2004—fueling the conflict for years afterward.91

Putin’s reputation as a merciless ruler and fervent Russian nationalist earned the respect of the Russian people. His approval rating soared amid the bombings and their aftermath. Meanwhile, at the same time the second Chechen conflict was raging, a plan to ensure Putin would be Yeltsin’s permanent replacement was already underway.92

In November 1999, the powerful oligarch Berezovsky traveled to Washington to meet with President Clinton’s longtime friend and Russia expert, Strobe Talbott. In Washington, Berezovsky sang Putin’s praises and assured Talbott that Putin would be a friend of the U.S. and the North Atlantic Treaty Organization (NATO). Financier George Soros, who knew Berezovsky, explained what the oligarch was up to:

Berezovsky and Yeltsin’s Family [i.e., his circle of associates] were looking for a way to perpetuate the immunity they enjoyed under the Yeltsin administration…Berezovsky’s situation turned desperate when the scandal broke over the laundering of Russian illegal money in U.S. banks in 1999, for he realized that he could no longer find refuge in the West. One way or the other he had to find a successor to Yeltsin who would protect him. That is when the plan to promote Putin’s candidacy was hatched.93

Talbott had already met with Putin in June of that year and publicly praised him. The week after Putin was elected president in March 2000, Talbott testified in Congress to answer the question on everyone’s mind—Who is Vladimir Putin? Talbott’s tone was complimentary, and he took every opportunity to highlight Putin’s commitment to democratic ideals. However, he equivocated over whether to trust Putin and ultimately concluded, the “short answer, of course, is that we don’t know.”94

In December 1999, Putin gave a speech on “Security Organs Day” (also called “Chekist Day”) at Moscow’s intelligence headquarters building (called the Lubyanka). “Putin said that ‘the mission of the group of FSB officers sent undercover to work in the government is being accomplished successfully.’”95

As time went on, it became clearer that Putin’s crew of ex-KGB spooks—Siloviki Inc.—had entrenched itself in every Russian sector, from the Kremlin to private business and the media. As Putin’s former chief economic advisor put it, “there are now few areas of Russian life where [Siloviki Inc.’s] long arm fails to reach.”96

Putin’s Energy Kleptocracy

With the turn of the new millennium and the final exit of Boris Yeltsin from the stage, President Putin moved swiftly and tactically re-nationalizing (or privatizing/piratizing as the case may be) Russia’s strategic industries. Russia’s vast natural resources—especially uranium and oil—were crucial to his geopolitical strategy.

Just as he had done with restructuring the FSB in 1998, Putin quickly appointed cronies from his inner circle to run Russia’s energy and military-industrial complexes—positions of enormous power and profit—as soon as he became president.

One of Putin’s earliest moves was restructuring Russia’s electricity distribution network: Unified Energy System (UES). This effectively created a monopoly on the national high-voltage transmission grid and the local utility grids.

The UES supplied electrical power not just to Russia but to the neighboring republics too. The plan reportedly “angered both minority shareholders, who [feared] it could pave the way for an asset-grab, and [the opposition party], which described it as ‘criminal.’”97

Putin placed control of Russia’s literal power in the hands of his inner circle lieutenants (like the so-called reformist Anatoly Chubais and, later, the Siloviki Inc. head Igor Sechin). The Kremlin retained a controlling stake.98

Putin did likewise with other critical Russian industries, placing his close friend Vladimir Smirnov in charge of Russia’s nuclear sales corporation. Smirnov was a round- and ruddy-faced man with a thick mustache. He and Putin met in Germany in 1990 and discussed early investments in St. Petersburg. 99

They were part of a trade delegation to Frankfurt in 1992 and, by November 1996, Smirnov had become one of Putin’s closest inner circle members and the leader of the notorious Ozero Cooperative. In the early 2000s, Putin put Smirnov in charge of the nuclear sales behemoth Techsnabexport (Tenex) when he began restructuring Russia’s nuclear programs.100

Putin’s so-called inner circle consisted of an assortment of old KGB comrades like Smirnov, Ivanov, and Chemezov, and licit and illicit business partners from St. Petersburg like Nikolai Shamalov, Vladimir Yakunin, Yuri Kovalchuk, and the Fursenko brothers. The Ozero group was “the inner circle of Putin’s inner circle.”101

Ozero co-founder Yuri Kovalchuk became widely known as “Putin’s banker,” and runs the Putin insider bank: Rossiya Bank. His son, Boris, also held Rossiya Bank stock and later became CEO and chairman of the executive board of the Inter RAO UES—one of Russia’s largest and most powerful monopolies.102

The Kovalchuk and Shamalov families remain major stakeholders in Rossiya Bank, as do several other close associates of Putin. Putin has benefitted directly from Rossiya Bank since 1992, and the bank has been described as the “mega piggy bank of Putin’s entourage.”103

As Putin’s power increased, so did his fortunes and the fortunes of his cronies. By 2005, Rossiya Bank had purchased a 51 percent stake in SOGAZ, a gas insurance company that insures all of Russian petroleum giant Gazprom’s major (pipeline and exploration) projects. Rossiya Bank paid $58 million for the stake, which was valued at around $2 billion.104

When Putin came to power in 2000, he brought his St. Petersburg deputy Alexey Miller with him to Moscow. First, Putin installed Miller as deputy energy minister and later as CEO of Gazprom.105 Putin reportedly owns a 4.5 percent stake in Gazprom, among other companies he and his cronies control. Under Putin’s reign, Gazprom has become the world’s largest oil and gas producer, consistently generating over $100 billion in annual revenue.106

One way for the cronies to repay Putin and demonstrate their loyalty to him, appears to be putting Putin’s family members on the payroll. Shamalov’s son, Kirill, would eventually marry Putin’s daughter, Katerina Putina (also known as Katerina Tikhonova). Katerina’s holdings via her marriage to Kirill are estimated at around $2 billion.107

The Shamalovs and other inner circle oligarchs (such as Sechin and Chemezov) have enriched Putin’s daughter directly through several initiatives, which are funded by Rosatom and Gazprombank, among other Putin-connected entities.108 Kickbacks are a central and recurring theme in Putin’s ascent to power. Like most corrupt regimes, those who keep the dictator and his family well paid remain in his good graces.

The St. Petersburg Real Estate Holding Co. (German-registered “SPAG”) and Petersburg Fuel Company (Russia-registered “PTK”) were two significant kickback vehicles established by Putin and his cronies in 1992 and 1994, respectively. SPAG would later become famous for being one of Putin Inc.’s earliest money-laundering operations.109

Putin scholar Karen Dawisha explains how the SPAG money-laundering operation worked. In essence, Putin was a major gatekeeper in the St. Petersburg mayor’s office. As the head of the city’s Committee on Foreign Economic Relations (“KVS”), Putin granted licenses for foreign exchanges in and out of St. Petersburg.110

Putin’s deputies in the KVS were Alexey Miller (now head of Gazprom) and Dmitry Medvedev, among others. Medvedev acted essentially as Putin’s legal clerk and advisor. His office was right outside Putin’s, and he helped mastermind some of Putin’s early schemes. According to an audit by the Russian Federation, “in 1994, the humble clerk Medvedev owned 10% of Europe’s largest pulp and paper mill. Even then he was a millionaire. And this was only Medvedev, Putin’s advisor. Can you imagine what kind of money was already owned by his boss?”111

The sums of money flowing into and especially out of Russia at that time were massive and unprecedented.112

Both SPAG and PTK connected Putin closely to the Russian mafias known as the Malyshev and Tambov gangs through Vladimir Smirnov and Vladimir Kumarin.113

According to Smirnov, Putin’s longtime close friend, they first met in Frankfurt in 1991 and returned to that city with a trade delegation in 1992 to register SPAG. Smirnov was the co-owner of two SPAG subsidiaries in Russia that also employed Kumarin. Furthermore, Smirnov and other friends of Putin’s from his KGB days founded PTK in 1994. Both the SPAG and PTK operations required licenses from Putin’s office, which were granted in July 1994 and August 1994, respectively. One major investor in PTK was the “personal bank” for Putin and his associates: Rossiya Bank.114

Vladimir Kumarin, also known as “the Night Governor,” was the alleged leader of the ruthless Tambov gang, accused of money laundering, racketeering, contract killings, drug and human trafficking, and other violent crimes.115 According to Kumarin’s own estimates, “Putin had signed between eight hundred and eighteen hundred contracts during the early 1990s.”116

In early 1995, Putin granted PTK the exclusive rights to build gasoline stations throughout St. Petersburg and to supply the city’s massive fleet of municipal vehicles—every vehicle from cars and city buses to fire trucks, police cars, and ambulances. Putin also granted PTK authority to “participate in the formulation of policies of the St. Petersburg Mayor’s Office in the area of [gasoline] supply.”117

SPAG and PTK both benefitted from Deputy Mayor Putin’s sweetheart deals and were run by members of Putin’s inner circle (including his mayor’s office cronies, Ozero Cooperative co-founders, ex-KGB comrades, and even mafiosos). Dawisha claims that Putin profited both personally and substantially. Herman Gref was another Putin crony affiliated with SPAG, and he became one of Putin’s closest economic advisors.118

Putin was on the board of SPAG beginning in 1992 and subsequently granted Smirnov power of attorney to vote on behalf of the St. Petersburg Mayor’s Office, a major SPAG shareholder. The unusual arrangement led to multiple international criminal investigations. Offices were raided and arrests were made. Somehow, Putin escaped unscathed.119

On May 23, 2000, shortly after his inauguration, Putin resigned from the SPAG board. But SPAG was not Putin’s only self-enrichment scheme. Twentieth Trust, for example, was an entity that Putin had used to launder the kickbacks from the KVS office in St. Petersburg to international real estate ventures in at least eight countries, according to investigators. The criminal investigation into Twentieth Trust was closed three months after Putin’s inauguration.120

It appears that as investigators closed in on one Putin scheme, Putin simply cut ties and formed a new one.

The same month Putin was inaugurated, Gunvor Trading was formally established by Putin’s close friend Gennady Timchenko. Thanks to Putin’s connections, Swiss-based Gunvor rapidly became one of the largest oil traders in the world. According to a now-scrubbed article in The Economist, Gunvor’s byzantine ownership structure “looks like a Chinese puzzle…and has estimated revenues of $70 billion a year.”121

Putin reportedly owns a 50 percent stake in Gunvor, contributing significant sums to his personal fortune, which totals about $40 billion (according to a CIA assessment). Putin, of course, denied suggestions about his wealth, calling them “rubbish picked out of someone’s nose and smeared on bits of paper.”122

The German secret police (BND) had a file on Putin’s SPAG money-laundering operation. In July 2001, prosecutors in Liechtenstein indicted two of SPAG’s founders, Rudolf Ritter and Eugene von Hoffer, on money-laundering charges. The BND believed that SPAG had laundered millions of dollars for the Russian mafia as well as Colombian drug cartels.123

But German Chancellor Gerhard Schroeder, who called Putin a “flawless democrat,” apparently made the BND’s case against Putin disappear. As it turns out, Schroeder was appointed to the head of the shareholders committee of the lucrative Russian gas pipeline company, Nord Stream (which supplies Germany with fuel), shortly after leaving office.124

But SPAG was just one of several instances where Putin’s Russian and German relationships overlapped. The German connection dates back to his days working as a KGB officer in Dresden between 1975 and 1990.

It was in Dresden where Putin met then-Stasi officer Matthias Warnig. In those days, the Soviets and the East Germans cooperated closely—especially on intelligence and espionage operations. Putin and Warnig were photographed together during an awards ceremony in Dresden. Over time, Putin and Warnig became very close.125

Warnig went to work for Dresdner Bank—one of Germany’s oldest financial institutions—in March 1990, shortly after the Stasi disbanded. In 1991, Dresdner tasked Warnig with opening a branch in St. Petersburg. As luck would have it, Warnig knew just the man to talk to.126

Putin plucked Dresdner Bank’s application from the stack and personally authorized Dresdner’s entry into the Russian banking market. Two years later, Russia imposed a moratorium on licensing foreign banks, essentially protecting Dresdner from increased competition.127

Warnig was reportedly an early investor in Rossiya Bank and, when Putin needed help bringing oil tycoon Mikhail Khodorkovsky to heel, Warnig facilitated the transfer of wealth.128

Before Putin very publicly stripped him of all his assets and dignity in 2005, Khodorkovsky was the most powerful (and wealthy) oligarch in post-Soviet Russia. His personal funds were estimated at a staggering $18 billion—the bulk of which comprised his majority stake in Yukos, one of Russia’s largest oil companies.129

During the buccaneering days of early-nineties Russia, virtually every oligarch amassed his fortune through crooked means—including alleged kidnapping, extortion, and murder. Khodorkovsky was no exception. He was by no means the most deplorable criminal (relatively speaking), but Khodorkovsky’s enterprises were known to have openly violated Russian law with impunity.130

Putin knew that oligarchs like Khodorkovsky held the keys to the kingdom: Russia’s vast natural resources. The oligarchs that came to power under Yeltsin were skeptical of Putin, and many of them were not his biggest fans. The feeling was mutual. Putin realized, however, that to go to war with multiple oligarchs at once was a fool’s errand. So, he kept his friends close, his enemies closer, and then singled out the biggest enemy of all as an example.131

Khodorkovsky amassed his fortune through a series of corrupt deals. In 1995, he participated in a Chubais Loans for Shares scheme. Khodorkovsky’s bank loaned the cash-strapped Kremlin $159 million, and the Kremlin put up a 45 percent stake in Yukos—a prized state-owned asset—as collateral. The terms of the scheme basically guaranteed that the Kremlin would default on the loan.132

When the Kremlin predictably defaulted, Khodorkovsky gained nearly half of Yukos, which at the time was worth more than $3 billion—or nearly an 1,800 percent gain. Not bad. Within days, Khodorkovsky snapped up another 33 percent of Yukos from the distressed Kremlin for just $150 million. Khodorkovsky took full control of one of Russia’s most prized assets for pennies on the dollar.133

By 2003, Khodorkovsky had turned Yukos into a global player that supplied nearly 2 percent of the world’s oil and 20 percent of Russia’s domestic production. Yukos was the model Russian success story. The company was the first of its kind to adopt international accounting standards and to institute Generally Accepted Accounting Principles (GAAP). Yukos even hired Western world giant PricewaterhouseCoopers to sign off on their audit reports. Khodorkovsky apparently thought that these reforms made him untouchable. They did not.134

When Khodorkovsky began accusing Putin of corruption and infringement of civil rights, he poked the bear. When Khodorkovsky started donating heavily to Putin’s opponents, he woke the bear. When he set up a complex international business deal that involved Western acquisitions of strategic Russian energy assets, he had finally gone too far.

First, Khodorkovsky announced the merger of Yukos with Sibneft—an oil firm acquired by fellow oligarchs Boris Berezovsky and Roman Abramovich by way of Loans for Shares. The resulting YukosSibneft would have been far and away the largest Russian oil company, surpassing all others under Putin’s control—primarily Gazprom and the other oil giant, Rosneft. That was his first mistake.135

His next mistake would prove fatal. Khodorkovsky thought that he could start a bidding war between Exxon and Chevron over the not-yet-merged YukosSibneft behind Putin’s back. Khodorkovsky had become too irritating to ignore. He had crossed Putin’s red line.136

Putin loathed the prospect of foreign companies controlling Russia’s valuable domestic resources. When the Exxon CEO called Putin to make sure that the deal had the Kremlin’s blessing, Putin assured him it did not. The deal was off, and Khodorkovsky was irate.137

During a February 2003 meeting at the Kremlin, Khodorkovsky publicly accused Putin’s government of widespread bribery and corruption. He accused Putin of plundering state assets to give to his inner circle. Putin coolly flipped the accusation back on Khodorkovsky. How were all those valuable oil reserves acquired? Had Yukos paid all of its taxes? Were there any bribes?138

Virtually every oligarch tuned in, worried that Putin’s “live and let live” rule might be in jeopardy. What happened next guaranteed that no oligarch, no matter how wealthy or powerful they thought they were, would cross Putin again.139

In October 2003, masked FSB agents stormed Khodorkovsky’s plane. They threw him in jail and charged him with tax evasion, fraud, forgery, and embezzlement. The Kremlin demanded that Yukos pay $30 billion in back taxes—the first installment was due within forty-eight hours. Naturally, the company was unable to pay because Putin had already frozen its assets.140

In the blink of an eye, Khodorkovsky was broke and in prison. At the subsequent kangaroo trial that began in June 2004, the court took all the prosecution’s charges at face value and refused any exculpatory evidence from the defense. Adding insult to injury, Putin made Khodorkovsky sit in a cage and broadcast the spectacle on national television. After the trial, Khodorkovsky was sentenced to nine years in prison and served most of his sentence until he was set free in December 2013.141

When it came to the auction of Yukos’ assets, the Kremlin set terms that effectively dissuaded most viable competitors from bidding. Prospective bidders needed permission from the Russian anti-monopoly authority and had to deposit more than 49 billion rubles (or $1.7 billion) in advance.142

The sole qualified bidder, an unknown shell company, won the auction and paid $9.35 billion for Yukos’ most prized assets, a bargain compared to its value ranging from $10.4 to $22 billion. The shell company, called Baikal Finance Group, had a meager net capital of $300 and was registered at a cell phone store outside Moscow.143

Within days, it was obvious what had happened. Kremlin-backed Sberbank fronted the $1.7 billion down payment to Baikal Finance Group, and Kremlin-backed Rosneft loaned the rest (nearly $10 billion). When the auction was over, Rosneft took control of Yukos’ assets. Overnight, Rosneft tripled its production, quintupled its reserves, and became the third-largest oil producer in the country.144

Putin had sent an “unmistakable signal” when he installed his inner circle Siloviki man, Igor Sechin, as Rosneft chairman less than six months before the auction. The rigged Yukos auction catapulted Rosneft from a forlorn mid-ranking producer to a top-tier prized asset.145

Bringing Khodorkovsky to his knees and appropriating his billions may have been Putin’s boldest (and savviest) move to date because it signaled a change in the status quo. In one fell swoop, Putin brought every oligarch to heel, silenced a powerful critic, increased the oil reserves of his favorite company, and scored a victory with the public, who had always wanted to see oligarchs punished for their greed. The televised trial with Khodorkovsky in a cage was an added bonus.146

The controlled demolition of Yukos proved that Russian energy conglomerates effectively had one manager: Putin. It also kicked off a new era in his career, and the world learned that Putin would rule Russia with an iron fist.

First, he sacked his entire cabinet, including his prime minister, in February 2004. Next, he began to restructure many of Russia’s major energy producers and turned them into massive, state-owned juggernauts.147

With the bulk of Russian energy supplies firmly in the hands of his loyalists, Putin began amassing power and leverage outside of Russia. It was in this new era that Putin’s weaponization of energy became a serious threat to his European neighbors.