Putin’s People

But even though the Kremlin lawyers had not opened a fraud case against him in the UK, even though there appeared to be no trail of stolen funds, the legal pursuit of Pugachev was relentless. Lawyers working for the Russian State Deposit Agency insisted they had him ‘bang to rights’ over Mezhprombank’s bankruptcy. ‘If you get cash from a regulator, you should take it to help the bank survive, not fund a payment to yourself,’ one person close to the legal team said.[12] Despite the Kremlin having expropriated his business empire, and his having begun to fear for his life, Pugachev was found in contempt of court for fleeing the UK, and sentenced in absentia to two years in jail. During the contempt hearings he was frequently branded a liar. He’d flouted the rules of the freezing order. He’d not only fled the country, but transferred funds from the sale of two cars to France. One of the judges presiding over the case, Justice Vivienne Rose, found she could not ‘safely rely on any evidence he gave’. A New Zealand trust he’d set up to hold tens of millions of dollars in properties, including his Chelsea home, was later found to be a sham.

For all his flaws, Pugachev insisted he had been caught in a Russian state vendetta pursued through the UK courts. The Kremlin seemed intent on quashing any notion that he’d ever been well-connected in the Kremlin, or that he could have any knowledge that could be damaging to it. It had been able to suppress any political connotation to the case by leveraging the diminishing knowledge of Russia in the UK intelligence services, which had been distracted by monitoring the Islamic terrorist threat, and Pugachev’s own low profile. Before things had got tough in London, Pugachev had never given an interview in his life. Few knew who he was. Most people believed it was the recently deceased oligarch Boris Berezovsky who had helped bring Putin to power. Lawyers at Hogan Lovells had been told that Pugachev was a nobody, and the case against him had nothing to do with politics. ‘I’ve not seen any evidence of what he was doing in the Kremlin,’ said one person close to the legal team. ‘We have to be extremely careful. Pugachev seems to say whatever he wants. The people I have spoken to just say he was a blatant crook.’[13]

But in fact Pugachev had worked at the heart of the Kremlin, and had been privy to some of its deepest secrets, including how it was exactly that Putin came to power. This seemed to be one of the main reasons the Kremlin was so intent on pursuing him, and making sure he was tied up in legal knots. Even before the Kremlin took over his business empire, he’d been seeking to leave Russia, to escape the endless intrigue of business there. Already, he’d been sidelined by Putin’s KGB allies from St Petersburg, and he’d begun seeking French citizenship in 2007. For those on the inside, Pugachev was being punished precisely for seeking to exit the tight-knit system that ruled Russia, the mafia clan which no one was ever meant to leave. ‘Pugachev was like a kidney. He was essential for the functioning of the system. But he lost his mind and thought he could leave and work on his own business. Of course the order was given to destroy him,’ said a senior Russian banker involved in financial operations for the Kremlin.[14]

In the rush of his flight from the UK to France, Pugachev left behind a number of telltale signs. Detectives working for the Kremlin’s lawyers had swooped in to raid his Knightsbridge office on a court order issued in the days after his disappearance. Among the reams of documents, there were a number of disc drives. On one of the disc drives were recordings: the Russian security services had been secretly taping every meeting he held in his downtown Moscow office since the end of the nineties.

One of the recordings vividly documents Pugachev’s candid and rueful feelings about Putin and his own role in bringing him to power. The tape records Pugachev sitting in his office with Valentin Yumashev, former president Boris Yeltsin’s son-in-law and chief of staff, discussing over dinner and fine wine the tense state of affairs as Moscow hurtled through yet another political crisis. It was November 2007, and just a few months remained before Putin would come to the end of his second consecutive term as president, at which point Russia’s constitution dictated that he must step down. But although Putin had made vague statements about becoming prime minister after standing down as president, there was not yet even a whisper of his real intentions. In the warren-like corridors of the Kremlin, the former KGB and security men who had risen to power with Putin had been jostling for position, bickering and backstabbing in hopes that they, or their candidate, would be selected as his successor.

Pugachev and Yumashev quietly clinked glasses as they discussed the standoff. The uncertainty over the succession was bringing back strong memories of 1999, when they’d assisted Putin’s rise. It seemed to them an age ago. By now they had been eclipsed by Putin’s KGB allies from St Petersburg. By now they were almost relics from a totally different era. The system of power had changed irrevocably, and they were still struggling to understand what they’d done.

‘You remember how it was when he came into power?’ says Pugachev on the tape. ‘He would say, “I am the manager. I have been hired.”’ In those days, Putin had appeared reluctant to take the leading role, and seemed malleable and compliant to those who’d helped bring him to power. ‘Between us, at the beginning I think he had the idea to become rich, to live a happy life, to decide his own personal issues,’ Pugachev goes on. ‘And in principle, he decided these issues very quickly … But as the four years of his first term passed he understood things had happened that would never allow him to step down.’

Putin’s first term had been drenched in blood and controversy. It led to a sweeping transformation of the way the country was run. He faced a series of deadly terrorist attacks, including the siege of the Dubrovka theatre in Moscow by Chechen terrorists in October 2002. The hostage-taking ended with more than a hundred dead when the Russian security services botched the storming of the theatre and gassed the very theatregoers they’d been trying to free.

Putin’s battles with rebels from the restive northern Caucasus republic of Chechnya had caused thousands of deaths, including the 294 who died in a string of apartment bombings. Many in Moscow whispered Putin’s security services were behind these bloody attacks, not least because the end result was a security clampdown that strengthened his power.

The freewheeling oligarchs of the 1990s were soon brought to heel. It had taken just one big case against the country’s richest man for Putin and his men to rein in the market freedoms of the Yeltsin era, and to launch a takeover by the state.

‘He would have gone gladly after four years, I think,’ Pugachev continues. ‘But then all these controversies happened. With the West now, there is such a serious standoff that it’s almost the Cuban missile crisis. And now he’s gone even deeper … He understands that if it goes further, he will never get out.’

For both these men, the power construct built by Putin, by which the president had accumulated so much power that everything now depended on him, looked the very opposite of stable. ‘It’s a pyramid. All you have to do is knock it once and it will all collapse … He understands all this, but he can’t change himself.’

‘I don’t have the feeling he understands any of this,’ says Yumashev.

‘It would be strange if he said everything I did is backward,’ Pugachev interjects. ‘Many of the decisions he makes are based on his convictions of how the world is run. The subject of patriotism – he believes this sincerely. When he says the collapse of the Soviet Union was a tragedy, he believes this sincerely … He just has such values. What he does he does sincerely. He sincerely makes mistakes.’

Putin had often justified his consolidation of all levers of power – which included ending elections for governors, and bringing the court system under Kremlin diktat – by saying such measures were necessary to usher in a new era of stability, ending the chaos and collapse of the 1990s. But behind the patriotic chest-beating that, on the face of it, appeared to drive most of the decision-making was another, more disturbing factor. Putin and the KGB men who ran the economy through a network of loyal allies now monopolised power, and had introduced a new system in which state positions were used as vehicles for self-enrichment. It was a far cry from the anti-capitalist, anti-bourgeois principles of the Soviet state they had once served.

‘These people, they are mutants,’ says Pugachev. ‘They are a mixture of homo-soveticus with the wild capitalists of the last twenty years. They have stolen so much to fill their pockets. All their families live somewhere in London. But when they say they need to crush someone in the name of patriotism, they say this sincerely. It’s just that if it’s London they’re targeting, they will get their families out first.’

‘I think it is a terrible thing,’ says Yumashev. ‘Some of my friends who work in the Kremlin now say – with absolute sincerity – how great it is they can get so rich there. In the nineties, this was unacceptable. You either had to go into business or work for the country. Now they go and work for the state to earn money. Ministers hand out licences to make money. And of course all this comes from the boss … The first conversation [Putin] has with a new state employee is, “Here is your business. Share it only with me. If someone attacks you, I will defend you … and if you don’t [use your position as a business] you are an idiot.”’

‘Putin said this himself,’ says Pugachev. ‘Openly. I remember, I was speaking with him. He said, “What is that guy waiting for? Why isn’t he earning? What is he waiting for? He has the position. Let him make money for himself.” These are now like people who have drunk blood. They can’t stop. Now it is state officials who are the businessmen.’

‘There are very few real businessmen left,’ Yumashev agrees, shaking his head sadly. ‘The atmosphere … The atmosphere has changed so much in the country. The air has changed. It’s suffocating now. Suffocating.’

The two men sigh. Everything has changed – apart from their ability to idealise their own roles. ‘What was great about the nineties was that there were no lies,’ Yumashev continues.

‘Absolutely,’ says Pugachev. ‘For me, my whole life, the truth was equivalent to freedom. I earned money not for riches, but for freedom. How much can you spend? As long as you have enough to buy two pairs of jeans, that’s fine. But a certain independence gave me one thing: I don’t need to lie.’

It seemed to the two men that the president had become surrounded by yes-men, all of whom proffered lengthy toasts to Putin, telling him he had been sent by God to save the country, while they served at his pleasure. Yet it seemed to Pugachev that these yes-men understood the deep hypocrisy of the system, the sham democracy represented by the Kremlin’s ruling party, United Russia, and how deeply corrupt it had become.

‘Look at the people around VV [Putin], who say Vladimir Vladimirovich, you’re a genius!’ Pugachev continues. ‘I look at them – and they don’t believe in anything. They understand it’s all crap. That United Russia is crap, the elections are crap, the president is crap. But they understand all this, and then they go on stage and say how great everything is. And all the toasts they make, which are total lies. They can sit and tell … rubbish about how they have always been together, ever since they were sitting on the school bench. But at the same time the guys sitting in the office next door are saying, “As soon as he comes out, let’s finish him off.” There is such cynicism. I don’t think they feel comfortable. The ones who have power … I am sorry for them. They’re stealing from all sides, and then they come out and speak about how Putin is fighting against corruption. I look at them and think, this is the end. I’m sorry for them … VV was always asking, “What is that word beginning with s? Sovest – conscience.” They don’t have receptors for this. They don’t understand it. They forgot the word and what it means. They’ve gotten totally messed up.’

All the achievements of the Putin era so far – the economic growth, the increase in incomes, the riches of the billionaires that had turned Moscow into a gleaming metropolis where sleek foreign cars filled the streets and cosy cafés opened on street corners – boiled down to the sharp increase in the oil price during the Putin years, they agree. ‘In 2000 the oil price was $17 and we were happy,’ says Yumashev. ‘When you and I were in power it was $10, $6. The best time for me was when it hit $16 for two to three weeks. Now it’s $150, and the only thing they’re doing is building awful houses for themselves.’

‘The state is doing nothing with the money. They could have transformed the country’s infrastructure. But he thinks everything will be stolen if we build roads … Time is passing so quickly,’ says Pugachev.

‘Eight years have gone. In 2000 we gave the boss such a smoothly oiled machine. Everything worked. And what did we get?’ asks Yumashev.

‘We didn’t understand that he wasn’t going to drive things forward. I thought he was liberal, young,’ Pugachev replies.

‘For me it was principally important that he was young,’ says Yumashev.

‘You understand it turned out he was from a different species.’

‘Yes. They are different people,’ Yumashev agrees.

‘They are different, special people. This was something we didn’t understand. The person who understood this very well was Ustinov [the prosecutor general],’ says Pugachev. ‘He told me, “You understand, the guys from the security services, they are different. Even if you were to suck all their blood out and then put on a different head, they would still be different. They live in their own system. You will never be one of them. It is an absolutely different system.”’

The recording offers a unique window into the unguarded views of two men who had brought Putin to power, and their horror at the system they’d help create. This book is the story of that system – the rise to power of Putin’s KGB cohort, and how they mutated to enrich themselves in the new capitalism. It is the story of the hurried handover of power between Yeltsin and Putin, and of how it enabled the rise of a ‘deep state’ of KGB security men that had always lurked in the background during the Yeltsin years, but now emerged to monopolise power for at least twenty years – and eventually to endanger the West.

This book began as an effort to trace the takeover of the Russian economy by Putin’s former KGB associates. But it became an investigation into something more pernicious than that. First research – and then events – showed that the kleptocracy of the Putin era was aimed at something more than just filling the pockets of the president’s friends. What emerged as a result of the KGB takeover of the economy – and the country’s political and legal system – was a regime in which the billions of dollars at Putin’s cronies’ disposal were to be actively used to undermine and corrupt the institutions and democracies of the West. The KGB playbook of the Cold War era, when the Soviet Union deployed ‘active measures’ to sow division and discord in the West, to fund allied political parties and undermine its ‘imperial’ foe, has now been fully reactivated. What’s different now is that these tactics are funded by a much deeper well of cash, by a Kremlin that has become adept in the ways of the markets and has sunk its tentacles deep into the institutions of the West. Parts of the KGB, Putin among them, have embraced capitalism as a tool for getting even with the West. It was a process that began long before, in the years before the Soviet collapse.

Putin’s takeover of strategic cash flows was always about more than taking control of the country’s economy. For the Putin regime, wealth was less about the well-being of Russia’s citizens than about the projection of power, about reasserting the country’s position on the world stage. The system Putin’s men created was a hybrid KGB capitalism that sought to accumulate cash to buy off and corrupt officials in the West, whose politicians, complacent after the end of the Cold War, had long forgotten about the Soviet tactics of the not too distant past. Western markets embraced the new wealth coming from Russia, and paid little heed to the criminal and KGB forces behind it. The KGB had forged an alliance with Russian organised crime long ago, on the eve of the Soviet collapse, when billions of dollars’ worth of precious metals, oil and other commodities was transferred from the state to firms linked to the KGB. From the start, foreign-intelligence operatives of the KGB sought to accumulate black cash to maintain and preserve influence networks long thought demolished by the Soviet collapse. For a time under Yeltsin the forces of the KGB stayed hidden in the background. But when Putin rose to power, the alliance between the KGB and organised crime emerged and bared its teeth. To understand this process, we must go back to the beginning of it all, to the time of the Soviet collapse.

For the men who helped bring Putin to power, the revanche has also brought a reckoning. Pugachev and Yumashev had begun the transfer of power in desperate hurry, as Yeltsin’s health failed, in an attempt to secure the future of the country – and their own safety – against what they believed to be a Communist threat. But they too had forgotten the not too distant Soviet past.

The security men they brought to power were to stop at nothing to prolong their rule beyond the bounds of anything they’d thought possible.

‘We should have spoken to him more,’ sighed Yumashev.

‘Of course,’ said Pugachev. ‘But there wasn’t any time.’

PART ONE

1
‘Operation Luch’

ST PETERSBURG – It’s early February 1992, and an official car from the city administration is slowly driving down the main street of the city. A grey slush has been partially swept from the pavements, and people are trudging through the cold in thick anonymous coats, laden with bags and hunched against the wind. Behind the fading façades of the once grand houses on Nevsky Prospekt, shops stand almost empty, their shelves practically bare in the aftershocks of the Soviet Union’s sudden implosion. It’s barely six weeks since the Soviet Union ceased to exist, since the fateful day when Russia’s president Boris Yeltsin and the leaders of the other Soviet republics signed their union out of existence with the stroke of a pen. The city’s food distributors are struggling to react to rapid change as the strict Soviet regulations that for decades controlled supply chains and fixed prices had suddenly ceased to exist.

In the bus queues and at the impromptu markets that have sprung up across the city as inhabitants seek to earn cash selling shoes and other items from their homes, the talk all winter has been of food shortages, ration cards and gloom. Making matters worse, hyperinflation is ravaging savings. Some have even warned of famine, sounding alarm bells across a city still gripped by memories of the Second World War blockade, when up to a thousand people starved to death every day.

But the city official behind the wheel of the black Volga sedan looks calm. The slight, resolute figure gazing intently ahead is Vladimir Putin. He is thirty-nine, deputy mayor of St Petersburg and the recently appointed head of the city’s foreign relations committee. The scene is being filmed for a series of documentaries on the city’s new administration, and this one centres on the youthful-looking deputy mayor whose responsibilities include ensuring adequate imports of food.[1] As the footage flickers back to his office in City Hall at Smolny, Putin reels off a string of figures on the tonnes of grain in humanitarian aid being shipped in from Germany, England and France. There is no need for worry, he says. Nearly ten minutes is spent on careful explanations of the measures his committee has taken to secure emergency supplies of food, including a groundbreaking deal for £20 million-worth of livestock grain secured during a meeting between the city’s mayor, Anatoly Sobchak, and British prime minister John Major. Without this act of generosity from the UK, the region’s young livestock would not have survived, he says.

His command of detail is impressive. So too is his grasp of the vast problems facing the city’s economy. He speaks with fluency of the need to develop a class of small and medium business owners as the backbone of the new market economy. Indeed, he says, ‘The entrepreneurial class should become the basis for the flourishing of our society as a whole.’

He speaks with precision on the problems of converting the region’s vast Soviet-era defence enterprises to civilian production in order to keep them alive. Sprawling plants like the Kirovsky Zavod, a vast artillery and tank producer in the south of the city, had been the region’s main employer since tsarist times. Now they were at a standstill, as the endless orders for military hardware that fuelled and eventually bankrupted the Soviet economy had suddenly dried up. We have to bring in Western partners and integrate the plants into the global economy, says the young city official.

With sudden intensity, he speaks of the harm Communism wrought in artificially cutting off the Soviet Union from the free-market relations linking the rest of the developed world. The credos of Marx and Lenin ‘brought colossal losses to our country’, he says. ‘There was a period of my life when I studied the theories of Marxism and Leninism, and I found them interesting and, like many of us, logical. But as I grew up the truth became ever more clear to me – these theories are no more than harmful fairy tales.’ Indeed, the Bolshevik revolutionaries of 1917 were responsible for the ‘tragedy we are experiencing today – the tragedy of the collapse of our state’, he boldly tells the interviewer. ‘They cut the country up into republics that did not exist before, and then destroyed what unites the people of civilised countries: they destroyed market relations.’

It is just a few months since his appointment as deputy mayor of St Petersburg, but already it is a powerful, carefully crafted performance. He sits casually straddling a chair backwards, but everything else points to precision and preparation. The fifty-minute film shows him on the judo mat flipping opponents over his shoulder, speaking fluent German with a visiting businessman, and taking calls from Sobchak about the latest foreign aid deals. His meticulous preparation extends to the man he specifically requested to conduct the interview and direct the film: a documentary film-maker known and loved across the Soviet Union for a series he made intimately charting the lives of a group of children, a Soviet version of the popular UK television series Seven Up. Igor Shadkhan is a Jew, who recently returned to St Petersburg from making a series of films on the horrors of the Soviet Gulag in the far north; a man who still flinches at the memory of anti-Semitic slurs from Soviet times, and who, by his own admittance, still ducks his head in fear whenever he passes the former headquarters of the KGB on the city’s Liteyny Prospekt.

Yet this is the man Putin chose to help him with a very special revelation, the man who will convey to the world the fact that Putin had served as an officer in the feared and hated KGB. It is still the first wave of the democracy movement, a time when admitting this could compromise his boss, Sobchak, a rousing orator who rose to mayor on a tide of condemnation of the secrets of the old regime, of the abuses perpetrated by the KGB. To this day, Shadkhan still questions whether Putin’s choice was part of a careful rehabilitation plan. ‘I always ask why he chose me. He understood that I was needed, and he was ready to tell me he was from the KGB. He wanted to show that people of the KGB were also progressive.’ Putin chose well. ‘A critic once told me that I always humanised my subject matter, no matter who they were,’ Shadkhan recalls. ‘I humanised him. I wanted to know who he was and what did he see. I was a person who had always criticised the Soviet authorities. I endured a lot from them. But I was sympathetic to him. We became friends. He seemed to me one who would drive the country forward, who would really do something. He really recruited me.’[2]

Throughout the film, Putin artfully takes opportunities to stress the good qualities of the KGB. Where he served, he insists in response to a delicate question on whether he abused his position to take bribes, such actions were considered ‘a betrayal of the motherland’, and would be punished with the full force of the law. As for being an ‘official’, a chinovnik, the word need not have any negative connotation, he claims. He’d served his country as a military chinovnik; now he was a civilian official, serving – as he had before – his country ‘outside the realm of political competition’.

By the end of the documentary, Shadkhan appears to have fully bought in. The film concludes with a nod and a wink to a glorified KGB past: Putin is shown surveying the icy river Neva, wrapped against the cold in a fur hat, a man of the people behind the wheel of a white Zhiguli, the boxy car ubiquitous in those days. As he watches over the city with a steely and protective gaze, the film closes to the strains of the theme tune from a popular Soviet TV series – 17 Moments of Spring – that made a hero out of an undercover KGB spy who had infiltrated deep into Nazi Germany’s ruling regime. It was Shadkhan’s choice. ‘He was a person exactly of his profession. I wanted to show how it turned out that he was still in the same profession.’

Putin, however, had taken care in the interview to give the impression that he’d resigned from the KGB as soon as he’d returned to Leningrad, as St Petersburg was then called, in February 1990. He told Shadkhan that he’d left for ‘all kinds of reasons’, not for political ones, indicating that he’d done so before he started working in May of that year with Sobchak, then a law professor at Leningrad’s State University and the fast-rising star of the city’s new democratic movement. Putin had returned to the tsarist-era capital from five years of service in Dresden in East Germany (the German Democratic Republic, or GDR), where he’d served as liaison officer between the KGB and the Stasi, the East German secret police. Later legend had it that he’d confided to a colleague that he feared he might have no better future than working as a taxi driver on his return.[3] Apparently he was keen to create the impression that he’d cut all ties to his old masters, that Russia’s rapidly changing order had cast him adrift.

What Putin told Shadkhan was just the start of a string of falsehoods and obfuscation surrounding his KGB career. In the imploding empire that he had returned to from Dresden, nothing was quite as it seemed. From the KGB villa perched high on the banks of the river Elbe overlooking Dresden’s still elegant sprawl, Putin had already witnessed at first hand the end of the Soviet empire’s control of the GDR, the collapse of the so-called socialist dream. The Soviet Union’s Warsaw Pact power bloc had shattered around him as its citizens rebelled against the Communist leadership. He’d watched, first from afar, as the aftershocks began to reverberate across the Soviet Union and, inspired by the Berlin Wall’s collapse, nationalist movements spread ever more rapidly across the country, forcing the Communist leader Mikhail Gorbachev into ever more compromise with a new generation of democratic leaders. By the time of Putin’s interview with Shadkhan, one of those leaders, Boris Yeltsin, had emerged victorious from an attempted hard-line coup in August 1991. The abortive putsch had sought to turn the clock back on political and economic freedoms, but ended in resounding failure. Yeltsin banned the Communist Party of the Soviet Union. The old regime, suddenly, seemed to have been swept away.

But what replaced it was only a partial changing of the guard, and what happened to the KGB was a case in point. Yeltsin had decapitated the top echelon of the KGB, and then signed a decree breaking it up into four different domestic services. But what emerged in its place was a hydra-headed monster in which many officers, like Putin, retreated to the shadows and continued to serve underground, while the powerful foreign-intelligence service remained intact. It was a system where the rules of normal life seemed to have long been suspended. It was a shadowland of half-truths and appearances, while underneath it all factions of the old elite continued to cling to what remained of the reins.

Putin was to give several different versions of the timing and circumstances of his resignation from the KGB. But according to one former senior KGB officer close to him, none of them are true. He would tell interviewers writing his official biography that he resigned a few months after he began working for Sobchak at the university, but his resignation letter had somehow got lost in the post. Instead, he claimed, Sobchak had personally telephoned Vladimir Kryuchkov, the then KGB chief, to ensure his resignation at the height of the hard-line August 1991 coup. This was the story that became the official version. But it sounds like fiction. The chances of Sobchak reaching Kryuchkov in the middle of a coup in order to secure the resignation of one employee seem slim at best. Instead, according to the close Putin ally, Putin continued receiving his paycheque from the security services for at least a year after the August coup attempt. By the time he resigned, his position at the top of Russia’s second city’s new leadership was secure. He’d penetrated deep into the country’s new democratic leadership, and was the point man for the administration’s ties with law enforcement, including the KGB’s successor agency, the Federal Security Service, or FSB. His performance as deputy mayor, as clearly presented in the Shadkhan interview, was already slick and self-assured.