Putin’s Kleptocracy: Who Owns Russia? (Excerpt)

In reacting to Russia’s annexation of Crimea and support for pro-Russian separatists in Ukraine in early 2014, the U.S. government announced an unprecedented response: not the Russian state but individual Russian citizens would be subjected to asset seizures and visa bans. The Sixth Fleet was not called into action; exports to Russia as a whole were not banned; cultural and educational exchanges were not stopped. Rather, individual elites close to “a senior Russian Government official” — Vladimir Putin — were targeted.

Probably the most serious international crisis since the end of the Cold War, and the White House targets individuals. Why this response? Because at last, after fourteen years of dealing with President Vladimir Putin as a legitimate head of state, the U.S. government has finally acknowledged publicly what successive administrations have known privately — that he has built a system based on massive predation on a level not seen in Russia since the tsars. Transparency International estimates the annual cost of bribery to Russia at $300 billion, roughly equal to the entire gross domestic product of Denmark, or thirty-seven times higher than the $8 billion Russia expended in 2007 on “national priority projects” in health, education, and agriculture. Capital flight, which officially has totaled approximately $335 billion since 2005, or about 5 percent of GDP, reaching over $50 billion in the first quarter of 2014 alone, has swollen Western bank coffers but made Russia the most unequal of all developed and emerging economies (BRIC: Brazil, Russia, India, China), in which 110 billionaires control 35 percent of the country’s wealth.

And these billionaires, far from being titans of industry motoring the modernization of the Russian economy, have secured and increased their wealth by relying on and bolstering the centralized power of the state. The wealth of the oligarchs and political elites who came to power with Putin in 2000 has been more stable than in any other G7 country; they have made millions, though some have also lost as much. Political leaders close to Putin have become multimillionaires, and the oligarchs around them, according to Forbes Russia, have become billionaires. They are able to maintain that power and wealth as long as they don’t challenge Putin politically. Under this system, the state absorbs the risk, provides state funds for investment, and gives those close to the Kremlin massive monetary rewards. With the return under Putin to state capitalism, the state nationalizes the risk but continues to privatize the rewards to those closest to the president in return for their loyalty.

Within weeks of Putin’s coming to power, the Kremlin began to erode the basic individual freedoms guaranteed under the 1993 Russian Constitution. This pattern of gradually closing the public space and denying citizens the rights of free press, assembly, and speech was present and planned from the very beginning, as will be shown in my discussion of a document, never before published outside Russia, detailing the plans made in late 1999 and early 2000 to reshape the entire Presidential Administration to achieve these ends.

In Russia, the Presidential Administration is the true locus of power, particularly under Putin’s “vertical of power.” Its offices and departments shadow and supervise the work of the government ministries, the two houses of the legislature, the courts, regional government, the media, and societal movements like youth groups and trade unions. It is from here that policy is made in all sectors of domestic and foreign policy, to be implemented by the government or passed into law by the Duma and the Federation Council.

Putin was enormously assisted by very favorable global economic conditions in which the price of oil shot up to over $140 per barrel, allowing the Kremlin to provide an increased standard of living for ordinary Russians and the emerging middle class while also creating greater social stability.

But Putin also benefited from the existence of a tight-knit circle that came with him from St. Petersburg and with whom he had worked for over a decade. In this book I lay out the case for the existence of a cabal to establish a regime that would control privatization, restrict democracy, and return Russia to Great Power (if not superpower) status. I also detail the Putin circle’s use of public positions for personal gain even before Putin became president in 2000. The trail leads to the establishment of Bank Rossiya, now sanctioned by the United States; the rise of the Ozero Dacha Consumer Cooperative, founded by Putin and other members now subject to visa bans and asset seizures; the links between Putin and Petromed, the medical supply company that diverted millions in state funds to build “Putin’s Palace” near Sochi; and the role of security officials from Putin’s KGB days in Leningrad and Dresden, many of whom have maintained their contacts with Russian organized crime.

Elections in all new democracies suffer from certain problems of weak party stability; poor, loose, and fluid electoral laws; and voter manipulation and fraud. However, these problems should decrease over time, leading to the consolidation of democratic institutions. In Russia, however, they have only increased, until in the 2011-12 electoral cycle the fraud and abuse were so widespread that popular demonstrations broke out. By the end of 2011, having come through a thoroughly fraudulent and publicly documented sham election for the Duma (the lower house of the Federal Assembly, Russia’s Parliament), it became crystal clear that the ability of activists in Moscow and St. Petersburg to seek democratic change was significantly inferior to the regime’s ability to suppress change.

After Putin publicly wept, possibly from relief, when he was declared the winner of the 2012 presidential elections, increased targeted repressions began again, reminiscent of the early 1930s or the late 1960s in the USSR. Nonviolent demonstrators were once again sentenced to either prison or indefinite psychiatric treatment. With the economy suffering a downturn — mainly because of elite plundering — the crony regime’s inner logic seemed clear: Putin was willing to use force to maintain his potentially indefinite hold on power so that his group could continue to loot the country without limit. In response, Russian websites held endless discussions of the reign of bespredel — the limitless and total lack of accountability of the elites — under the façade of “restoring Russian greatness.”

It is this kleptocratic tribute system underlying Russia’s authoritarian regime that the U.S. government sought to expose and punish beginning in April 2014. The names on the sanctions list read like a Who’s Who of Team Putin. For the first time the White House explicitly talked about Putin’s circle as his “cronies” and targeted their money abroad, exposing the fact that Western governments have known for some time the broad details of where this group’s money is, what their private rules are, and what high crimes and misdemeanors they have committed to establish and maintain their sistema — and that Western governments are no longer willing to keep silent.

How was this group formed? What were its origins? And why did it take Western policy and academic communities so long to embrace this view of the Russian political system as a steel hand in an initially velvet glove? We may never know precisely when the current regime decided to do what they have clearly done, any more than we know on which day Stalin stopped being a pencil pusher and decided to imprison millions in the Gulag, or even when Hitler hit on the idea of exterminating the Jewish population of Europe. Horrifying details such as these are not something one reads about in dictators’ memoirs after they start receiving their pension. It is a pity (purely from a historian’s point of view) that there is usually so little time between the collapse of dictators’ regimes and their own ultimate demise.

Because we can see that there is a complex and clever system in Russia, quite opaque and full of interesting details and inner rules, we should conclude that the system came about by intelligent design. But how? The evidence strongly suggests that it did not come about by chance. This book firmly rejects the ideas often promulgated in Western academic circles that Putin is an “accidental autocrat” or a “good tsar surrounded by bad boyars.”

Of course, the boyars — now called oligarchs — are indeed mainly bad. And of course, not every detail of their ascent could have been worked out in advance. Not everything went as planned; certainly they met with deep resistance from other rivals, in both St. Petersburg and Moscow. But I believe that Putin’s group could never have predicted how successful they would be and how little their acquisition of power would be resisted by Russians and the West. The contention of this book is that the group around Putin today is the same as the one that brought him to power from St. Petersburg in the 1990s and that the purpose of that project was never to embed Western-style democratic institutions and values. The group did not get lost on the path to democracy. They never took that path.

Why did the West not firmly resist “Putin’s project” until now? In the process of interviewing for this book, it became clear that many Western officials stationed in Russia certainly knew from the early 1990s what kind of operative Putin was and whom he depended upon to get things done. But he was regarded as a relatively low-level person in one city in one very turbulent country. And so the eyes of Western intelligence were wide shut until, in the course of less than two years, Putin rose from being an out-of-work deputy mayor, whose boss had just lost his bid for reelection, to the head of the Federal Security Service (Federal’naya Sluzhba Bezopasnosti, FSB), the modern-day KGB. One year later Putin was prime minister; six months after that he was president. Jobless to president in three and a half years. Only then did Western journalists and policymakers focus closely on his background and his circle, but by then it was too late.

According to government leaks to Newsweek, U.S. government analysis of Putin’s personal involvement in a money-laundering scheme through a German-based company, SPAG, led in 2000 to Russia’s being placed on an international money-laundering blacklist: “A key reason, said a former top U.S. official, was a sheaf of intelligence reports linking Putin to SPAG,” including documents showing he “signed important St. Petersburg city documents for the company’s benefit.” The pattern of helping his friends to the detriment of his people was set early.

… Putin was regarded as a reliable partner in helping the West target Islamic extremists, especially in Afghanistan, since there were Chechen fighters in al Qaeda camps too. Only slowly did Putin’s malevolence dawn on Western governments, especially in light of the Kremlin’s transparently predatory actions in taking apart Russia’s largest private oil company, Yukos, and imprisoning its independently minded owner, Mikhayl Khodorkovskiy, in 2005.

The following year, at the G8 meeting in St. Petersburg, President Bush called for “strengthened international efforts to deny kleptocrats access to our financial system,” but he still did not mention Russia by name.

Western newspapers now report that in 2007 a CIA assessment of Putin’s personal wealth “largely tracked” with assertions made by the Russian political analyst Stanislav Belkovskiy, who claimed that Putin had holdings totaling about $40 billion in the commodity-trading company Gunvor, the publicly traded state-majority-owned gas giant Gazprom, and the oil and gas company Surgutneftegaz. [1]

At last, one thought, the West might start to stand up against this vast scheme, with its potential to undermine not only Russia’s development but Western financial institutions, the banks, equity markets, real estate markets, and insurance companies that were showing signs of being undermined internally by employees eager to receive their commissions from these illicit transactions.

But then President Barack Obama, as have all new U.S. presidents, announced he was going to “reset” relations with Russia. As a result, Putin spent only minutes in the penalty box for the 2008 invasion of Georgia before being embraced at the 2009 G8 meeting of the world’s leading industrial nations. The meeting was hosted in Italy by Putin’s personal friend, Prime Minister Silvio Berlusconi, even as U.S. government cables reported allegations circling in Rome that he was “profiting personally and handsomely” from secret deals with Putin that included the “exchange of lavish gifts.” From 2008 to 2014 six more years were lost while low-level government officials gathered materials on Putin’s wealth and high-level political appointees ignored them.

In the academic world, there was a similar trend in writing about Russia. Books continued to frame Russia as a democracy, albeit one that was failing or in crisis. Like other scholars of Russia, I have spent a significant portion of my career thinking and writing about how the post-Communist states might make a transition toward democracy. Initially Western government and academic circles believed that institutions could be established in practically any country that would guide it along a democratic path. Most of the new central European countries had early elections, established non-Communist governments, and never looked back. Our uncurbed enthusiasm even extended to Russia. But then the quality of democracy in Putin’s Russia just kept getting worse…

… From the beginning Putin and his circle sought to create an authoritarian regime ruled by a close-knit cabal with embedded interests, plans, and capabilities, who used democracy for decoration rather than direction. In other words, Russia is both a democratic failure and a resounding success — that is, a success for Putin and his cronies and a success on their terms.

Of course, in this system, there is robust political contestation, there is great uncertainty and instability, and there are still democrats and democratic aspirations. There is also popular support for Putin beyond Russia’s intellectual classes — support bolstered by high oil prices and state control over almost the entire media space. The internal logic of this system has strengthened the power of Putin over the rest; of “manual control” over institutions; of instructions and “understandings” (ponyatiya) over law; and of money over everything.

Putin and his circle could have passed and upheld laws to protect, promote, cement, and sustain democratic institutions, but they chose not to. On the contrary, they have established what they themselves internally call a sistema that undermines, mocks, and mimics democracy but that actually serves the purpose of creating a unified and stable authoritarian state that allows individuals close to Putin and his associates to benefit personally from the unparalleled despoliation of Russia’s vast natural resources. The evidence I present suggests that, from the moment Putin took power in 2000, Russia ceased to be a place where democratic dreamers could flourish. To be sure, Putin has built a legalistic system, but this system serves to control, channel, and coerce the middle class and the broader elite while at the same time allowing the inner core to act with impunity along what has been called Putin’s “vertical of power,” according to the adage “For my friends, anything. For my enemies, the law!”

This is not to say that the Russian ruling elite does not see the benefits of a robust rule-of-law system. On the contrary, their behavior in parking their money in Western banks suggests they are very interested in it — just not in their own country.

The American economist Mancur Olson was right to posit that in the transition from dictatorship to democracy, “roving bandits” will over time gain an interest in laws to vouchsafe their gains and will settle down, and from this interest in the stability and predictability of gains, democracy will emerge. Under Putin, as the regime made the transition from what Olson called “roving” to “stationary” bandits, interelite violence did decrease, and the streets became safer, as Olson predicted. But Olson failed to foresee the extent to which globalization would allow Russian elites to continue to maximize their gains by keeping domestic markets open for their predation while minimizing their own personal risk by depositing profits in secure offshore accounts.

This book does not look in detail at what is happening in Russia today; instead I seek to ascertain the authoritarian moment in Russia. The story starts with the collapse of the USSR, when, as the archives of the Communist Party of the Soviet Union (CPSU) reveal, the KGB moved the CPSU’s vast financial reserves offshore, out from under President Mikhayl Gorbachev’s control, thus further crippling his regime. The August 1991 coup by Communist and KGB hardliners failed, but aspirations for revanche remained.

One of the chief PR strategists of Putin’s 2000 victory, Gleb Pavlovskiy, subsequently put it like this, after he had been sacked by the Kremlin:

“Putin belongs to a very extensive but politically invisible layer of people who after the end of the 1980s were looking for a ‘revanche’ in connection with the fall of the Soviet Union.”

The 1990s was spent preparing for that moment.

Vladimir Putin spent his entire early life yearning to join and was finally accepted into the KGB. By his own account, his favorite songs are Soviet standards, not Western rock. He has been deeply conservative his whole life. Yet he has also been a keen collector of every possible trapping of material wealth. When he was stationed in East Germany, he had the leaders of the German Red Army Faction (also known as the Baader-Meinhof Group) steal speaker systems for him when they had a moment free from their terror campaigns. Back in Russia in the early 1990s, Putin acquired a substantial country house, or dacha, and an apartment in the most prestigious section of St. Petersburg within his first years of working in the city; neither of these could have been purchased with his meager official salary.

This pattern of uncontrollable greed, of wanting what rightfully belongs to others, which Masha Gessen calls pleonexia, has resulted in over twenty official residences, fifty-eight planes, and four yachts. Sadly for Russians, Putin does not “own” any of these, except his St. Petersburg properties and perhaps his first yacht, the Olympia, which was presented to him as a gift by a group of oligarchs headed by Roman Abramovich just prior to Putin’s becoming president in 2000 and delivered in 2002.

Without the presidency Putin theoretically would not be allowed to keep any of these accoutrements of power, except perhaps for the $700,000 in watches that he routinely sports — six times his declared annual income, a subject of constant Russian journalistic interest. Thus his motivation to leave power is reduced to zero.

Those who say politicians can’t be called corrupt unless the police find $20,000 in small bills in their freezer, or who say “But the U.S. presidents have Camp David,” should contemplate how much has been spent from public funds on the construction, maintenance, furnishing, and round-the-clock staffing of these twenty residences, most of which did not exist, or at least not in their current gilded state, prior to Putin’s rule.

The demands of this tribute system have meant that the cost of doing business in Russia has escalated to such an extent that Russian and foreign businesses alike wonder whether they can even turn a profit.

The global Swedish furniture chain Ikea threatened to call it quits after years of trying to run a clean business in Russia. When the head of Ikea Russia, Lennart Dahlgren, left the company in 2006, he revealed that they had been subjected to years of legal traps that they sought to solve by meeting personally with Putin. But a high-ranking official told them that a meeting with Putin would cost $5 million to $10 million. Stating that he didn’t know whether they were speaking seriously or joking, Dahlgren told reporters: “I sensed that it would be better not to get into that discussion any deeper.”

A democracy is easier to research than a dictatorship. Even so, nondemocratic actions in a democracy, like corruption, are less easy to research than candidates’ public speeches, for example. When the subject of study is how, when, and why Russian elites decided to take the country away from democracy, obviously no one from this group is giving public interviews, and if they do, as happened with Aleksandr Litvinenko, they suffer a cruel death.

More difficult to research are Russian elites’ private financial motivations for taking certain actions and the clan conflicts within the elite that produce sometimes contradictory public results. I spent almost eight years studying archival sources, the accounts of Russian insiders, the results of investigative journalism in the United States, Britain, Germany, Finland, France, and Italy, and all of this was backed by extensive interviews with Western officials who served in Moscow and St. Petersburg and were consulted on background. Based on all this, I believe it is possible to construct a credible picture of Putin’s rise. I also consulted with and used many accounts by opposition figures, Russian analysts, and exiled figures who used to be part of the Kremlin elite. These have become an increasingly credible source of information, particularly as the number of émigrés increases.

Above all I have relied on the work of Russian journalists who wrote this story when the Russian media was still free. Many of them died for this story, and their work has largely been scrubbed from the Internet, or (as I discovered several times) infected with viruses attached to online documents, leading to computer crashes. Whole runs of critical newspapers have disappeared from Russian libraries. But “they” always forget to remove them all, and many Russians still keep clippings, reminiscent of a previous era when the state similarly ended press freedoms.

Finally, the dump of nonredacted cables from Wikileaks is very regrettable but also a completely fascinating source of information. For example, a 2010 cable from America’s ambassador in Moscow John Beyrle to the U.S. secretary of state provided the following description of how money, elections, criminal activity, and the Kremlin interact:

XXX [name redacted by author] stated that everything depends on the Kremlin and he thought that … many mayors and governors pay off key insiders in the Kremlin. XXX argued that the vertical works because people are paying bribes all the way to the top. He told us that people often witness officials going into the Kremlin with large suitcases and bodyguards full of money. The governors also collect money based on bribes, almost resembling a tax system, throughout their regions. He described how there are parallel structures in the regions in which people are able to pay their leaders. For instance, the FSB, MVD [Ministry of Internal Affairs], and militia all have distinct money collection systems. Further, XXX told us that deputies generally have to buy their seats in the government. They need money to get to the top, but once they are there, their positions become quite lucrative money making opportunities.

Vladimir Putin is both a product and a producer of this pervasive system of corruption. Of course, he is not the only Eurasian or Western leader to have collected gifts and tributes. But to have created with this clique an entire system that spans eleven time zones is by any account an impressive achievement. I argue that the outlines of the authoritarian and kleptocratic system were clear by the end of Putin’s first one hundred days in 2000. It is a story that begins even before the collapse of the USSR.

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Chapter One

The USSR at the Moment of Collapse

In December 2012, in a judicial hearing in London into the death of Aleksandr Litvinenko, a former operative for the Russian FSB who for some time had been a virulent critic of President Vladimir Putin, Hugh Davies, the counsel to the inquest, stated that evidence possessed by the British government established “a prima facie case in the culpability of the Russian state in the death of Alexander Litvinenko.” In July 2014, as relations with Russia deteriorated, British prime minister David Cameron announced he would let the public inquest proceed. At the center of the inquiry was a claim by Litvinenko’s widow that, at the time of his 2006 death by polonium-210 poisoning, he was providing evidence to Spanish authorities about “Russian mafia links to the Kremlin and Vladimir Putin.”

The inquest pointed to the tangled web of relations between the Russian state and the mafia, relations that were known to Western governments and much discussed in U.S. cables released by Wikileaks. In particular, a series of events in Spain underlined what had become an interlocking network of associations and clan-based politics centered on Putin. First there was the arrest in Spain in 2008 of the reputed leaders of the St. Petersburg-based Tambov-Malyshev organized crime group, including Gennadiy Petrov and Aleksandr Malyshev. Then there was the warrant for the arrest of Vladislav Reznik, who was the cochairman of the ruling United Russia Party and chairman of the Duma’s Finance Committee. Finally, there was the revelation that Communications Minister Leonid Reyman owned a beachfront house in the same resort in Majorca as Petrov, who introduced him to potential Spanish partners, and that Reyman himself was under investigation by Spanish authorities.

All those under investigation in Spain came from St. Petersburg, and all were close associates of Putin, as they rose up together from the early 1990s onward. This incident goes to the heart of whether, as Spanish prosecutors stated in classified briefings to U.S. and other Western governments, made public via Wikileaks, Russia under Putin had become a virtual “mafia state” in which state structures operate hand in glove with criminal structures to their mutual benefit, with the mafia operating within guidelines established by top Kremlin elites for the purpose of strengthening Putin’s hold on power, silencing critics, and maximizing mutual economic benefits.

Briefing U.S. officials behind closed doors, the Spanish prosecutor called Russia, Chechnya, and Belarus “mafia states” and stated that in such countries “one cannot differentiate between the activities of the government and OC [organized crime] groups.” Further, the security services “control OC in Russia… The FSB is ‘absorbing’ the Russia mafia” and using them for black operations as a price for operating on Russian territory. But at the same time, the prosecutor told U.S. officials, Russian organized crime responds to pressure by taking advantage of “the corruption of high-level ministers.” Extensive wiretaps showed that these Russian organized crime leaders had a “‘dangerously close’ level of contact with senior Russian officials.”

The secret cable reported Spanish press allegations that the Spanish government had compiled a list of Russian procurators, senior military officers, and politicians, including current and former ministers, who were involved with Petrov and Russian organized crime. The list included at least four sitting ministers, including the Russian minister of defense at that time, Anatoliy Serdyukov, who was notable for his “very close ties” to Petrov.

The cable that was released also referenced other classified lists of compromised officials that were not part of the Wikileaks documents but indicate that the U.S. government has had a very specific idea of the officials involved in links between the Russian government and Russian organized crime since at least 2008.

The questions arising from this fascinating story are many:

• What kind of system has Putin created?
• When did these plans emerge?
• Who is at the center of them along with Putin? What kind of control does Putin have over the plans themselves?

I suggest that the antidemocratic and politically illiberal aspects of the plans were present from the beginning, as were the efforts to create a liberal economic system that would allow Russians to enjoy the fruits of their labors more than at any time in their history. The plan was always that those closest to power would be in a position to enjoy those fruits on an unprecedented scale.

The story starts when the Soviet Union was still standing, if declining, in the 1970s and 1980s.

Beginning in the 1970s, when the Soviet leadership started to enter the world economy to sell oil in exchange for technology (some of it bought illegally at high prices) and grain to offset the structural problems in their own economy, they began to accumulate funds in hard currency abroad. Conflicts in the Middle East quadrupled the price of oil in the 1970s, thus massively increasing the amounts in Soviet overseas accounts.

These accounts were under the strict day-to-day control of the KGB and were used to fund foreign operations, underwrite friendly parties and movements, and purchase goods for import.

The strategic decisions about how the money would be spent were made by the Communist Party hierarchy, while the KGB was in charge of implementation. However, under Soviet president Mikhayl Gorbachev there is reason to think that the KGB declined to repatriate funds and only increased the economic crisis of a leadership in which they had no confidence.

Indeed, even more funds began to flood out of the USSR in the late 1980s for safekeeping abroad. As one well-placed Russian cooperative owner observed in 1989, “The West thinks the KGB is gone. They [the KGB] are no longer concerned with investigating people, but they are very involved in destabilizing perestroika. Last week the KGB created a new division of forty agents to do nothing but start joint ventures with Western firms. This is their experimental sociological work. If the crowds rush in tomorrow to kill Gorbachev, the KGB will do nothing because they are concentrating on their scientific experiments.”

When the newly elected Russian president Boris Yel’tsin banned the CPSU after the failed 1991 August coup against Gorbachev, the CPSU’s guidance ceased, and the control over this vast mountain of foreign money fell to KGB agents who had access to foreign operations and accounts.

Some of the money stayed abroad and disappeared, but when the USSR collapsed and assets became available for purchase inside the country, this money was available for investment to those who controlled the accounts. Thus were born, it is estimated, most of Russia’s oligarchs and commercial banks.

By the early 1990s KGB veterans who knew the details of these accounts needed like-minded officials in key positions who could help control who would get to invest in Russia and who would not. For this they found willing allies among the KGB and Party veterans who flooded into the new cooperative movement in the late 1980s and who then sought to build capitalism, enrich themselves, and control market entry. Among these was the rather more junior KGB official Vladimir Putin. And in trying to control what kind of economy would emerge, they were up against a formidable and historic collapse.

Some people visualize Russia in the late 1990s as a country that went through a “Wild West” period, or something similar to Al Capone’s reign in Chicago. But in 1999 a prominent expert stated in testimony before the U.S. Congress:

For the U.S. to be like Russia is today, it would be necessary to have massive corruption by the majority of the members of Congress as well as by the Departments of Justice and Treasury, and agents of the FBI, CIA, DIA [Defense Intelligence Agency], IRS, Marshal Service, Border Patrol, state and local police officers, the Federal Reserve Bank, Supreme Court justices, U.S. District court judges, support of the varied Organized Crime families, the leadership of the Fortune 500 companies, at least half of the banks in the U.S., and the New York Stock Exchange. This cabal would then have to seize the gold at Fort Knox and the federal assets deposited in the entire banking system. It would have to take control of the key industries such as oil, natural gas, mining, precious and semi-precious metals, forestry, cotton, construction, insurance, and banking industries — and then claim these items to be their private property. The legal system would have to nullify most of the key provisions against corruption, conflict of interest, criminal conspiracy, money laundering, economic fraud and weaken tax evasion laws. This unholy alliance would then have to spend about 50% of its billions in profits to bribe officials that remained in government and be the primary supporters of all of the political candidates. Then, most of the stolen funds, excess profits and bribes would have to be sent to off-shore banks for safekeeping. Finally, while claiming that the country was literally bankrupt and needed vast infusions of foreign aid to survive, this conspiratorial group would invest billions in spreading illegal activities to developed foreign countries… The President would not only be aware of all these activities but would support them.

This statement was made in testimony to the U.S. House Committee on Banking and Financial Services by Richard L. Palmer, who had been CIA chief of base and chief of station in countries of the former Soviet Union. When Palmer gave his testimony in September 1999, Putin was not yet president, but he was prime minister, he had been head of the successor organization to the KGB, the Federal Security Service, and he had been investigated on a number of occasions for high-level corruption and criminal activity.

Of course, there were those in the Russian government who were aware of the problem and had tried to correct it. On February 18, 1992, for example, the Yel’tsin-Gaidar government signed an agreement with an American corporate private investigation firm, Kroll Associates, to track down and help repatriate money illegally held or taken abroad by former Communist Party and Soviet government agencies, including the KGB. The money had allegedly left the country prior to the August 1991 attempted coup against the reformist-oriented Gorbachev by conservatives in the highest echelons of the ruling Communist Party and the KGB.

A group of Central Committee officials, including the head of the Party department dealing with the defense industry, the head of state television and radio, and the deputy head of the committee in charge of privatizing state property, were all dismissed after revelations about their involvement in embezzlement and capital flight. Several of them had also been involved in efforts during the Gorbachev period by a so-called patriotic wing of the special services to organize various provocations to undermine Gorbachev and prove that his reforms needed to be halted.

Yegor Gaidar, who at that time was the minister of finance, stated that this kind of activity was not only illegal but constituted continued political resistance to the government’s economic reform efforts: “Last year saw large-scale privatization by the nomenklatura [the high-ranking elite], privatization by officials for their own personal benefit.” The New York Times reported that the office of the Russian procurator general had been “unable to penetrate the maze of hidden bank accounts and secret investments, left behind by party officials acting in some cases … with the cooperation of the KGB… One estimate for the party’s hidden assets is $50 billion.”

Kroll, which had also led the hunt for stolen funds from the Marcos regime in the Philippines and Saddam Hussein’s invasion of Kuwait, was reported to have “found that thousands of mostly offshore bank accounts, real estate holdings and offshore companies had been set up to launder and shelter these funds and what had been the Soviet Union’s gold reserves.”

In response to this report and their own investigations, the Yel’tsin government passed a law giving it the right to confiscate funds taken abroad illegally. Yel’tsin was receiving monthly updates from Kroll; the lower house of the Russian Supreme Soviet, the Council of Nationalities (as it was called until December 1993), demanded that the Foreign Intelligence Service provide a report on Kroll’s progress, which Izvestiya reported was provided in a closed session by First Deputy Director Vyacheslav Trubnikov.

The Supreme Soviet Presidium had decreed that a special commission be established by the procurator general to investigate corruption, abuse of power, and economic offenses. Its report was presented to the Supreme Soviet in September 1993. In it Kroll’s efforts were noted; the document recounted widespread instances of “bribery of officials, blackmail, and the illegal transfer of currency resources to foreign banks,” with specific ministers sanctioned by name, including Minister of Foreign Economic Relations Pyotr Aven (whose activities in approving Putin’s early contracts as head of the St. Petersburg Committee for Foreign Liaison are dealt with below).

The report also criticized the Ministry of Security (the precursor of the FSB) for the fact that while it had opened three hundred investigations in the first six months of 1993 alone, only “two criminal cases had been instituted in practice.” In theory, in both Yel’tsin’s camp and in the Communist-dominated legislature, everyone was seeking to stanch the flow. But nothing happened in practice. As one of Kroll’s investigators stated, the report raised “suspicions about certain players and institutions [in the former Soviet Union]. Our problem is that when we sent it to Moscow, it was never followed up.”

This image of high-level culpability was reinforced when U.S. law enforcement intercepted telephone calls in the United States from the highest officials in President Yel’tsin’s office, Prime Minister Viktor Chernomyrdin’s staff, and other ministers to and from the head of the Russian firm Golden ADA, established in San Francisco, linking the firm to various scams that collectively added up to almost $1 billion.

The size of the scams is suggested by the fact that in 1994 Golden ADA had a declared taxable income in the United States of $111,485,984, according to U.S. court documents. FBI records show that the FBI turned over to Russia information linking Golden ADA with Yevgeniy Bychkov, the chairman of the Russian Committee for Precious Gems and Metals, and Igor Moskovskiy, a deputy minister of finance. Eventually, in 2001, with documents provided by FBI wiretaps, as the FBI website wryly states, both “were convicted of abusing their state positions and immediately granted State Duma amnesties.”

At an Aspen Conference in St. Petersburg in the early 1990s, I asked a high-ranking U.S. government official, “How many Russian government ministers have bank accounts abroad in excess of $1 million?” The reply came back immediately and without hesitation: “All of them. Every last one.”

This was the general view of what was going on throughout the entire country at the time, a view reaffirmed by subsequent Russian journalistic investigations.

While capital flight quickly became a broader problem involving economic entrepreneurs and industrial enterprises, the problem began with the privileged access to Soviet state reserves by insider KGB and CPSU elites.

The story began when KGB chairman Vladimir Kryuchkov convinced Gorbachev to use KGB-trained economists to stimulate and control an opening for Western investors in the USSR and increased Soviet investments abroad. Kryuchkov and the top leadership in the KGB distrusted Gorbachev and his policies and feared that he would lose control of the country.

Having received permission from the leader of the CPSU to control the process of opening up to the West, the top KGB leaders lost no time in ensuring that their institutional interests were secured. Russian and foreign journalists worked to put together the story of what had happened to the USSR’s reserves, and all signs pointed to efforts beginning in 1990, if not earlier, to prepare for the possible collapse of power.

Looking at the situation in eastern Europe, where Communist regimes had fallen without so much as a whimper, these investigative accounts suggest that Soviet KGB hardliners clearly acted to resist any similar assault. And they did this in collaboration with hardliners in the Party and with the support of Politburo decisions, specifically an August 23, 1990, Central Committee decree that authorized “urgent measures on the organization of commercial and foreign economic activities of the Party.”

Issued over the signature of Vladimir Ivashko, the deputy general secretary of the CPSU at the time, the memo expressed the need to develop an “autonomous channel into the party’s cash box,” in preparation for the time when the CPSU might not be the only party in the USSR.

The memo called for specific measures to protect the Party’s “economic interests”: form new economic structures abroad to provide the basis for “invisible party economics”; establish a foreign bank for the Central Committee that would “conduct currency operations”; and consult with the relevant state institutions to use “national property for the foreign economic work of the Party, [including] the property left after the Soviet armies left Czechoslovakia, Hungary and the German Democratic Republic.”

To achieve these ends, “there must be a strict observance of discreet confidentiality and the use of anonymous facades to disguise the direct use of money to the CPSU. The final objective is to build a structure of ‘invisible’ party economics … a very narrow circle of people have been allowed access to this structure… All this is confirmed by the experiences of many parties, working for decades within a framework of multiparty cooperation and market economics.”

To this end, a colonel in the KGB First Chief Directorate, Leonid Veselovskiy, was transferred to the Central Committee’s Administrative Department. A memo attributed to him was later uncovered by Paul Klebnikov, the American editor of Forbes Russia, assassinated in Moscow in 2004, and reads in part:

The earnings which are accumulated in the Party treasury and are not reflected in the financial reports can be used to purchase the shares of various companies, enterprises, and banks. On the one hand, this will create a stable source of revenue, irrespective of what may happen to the Party. On the other hand, these shares can be sold on the security exchanges at any time and the capital transferred to other spheres, allowing the Party to keep its participation anonymous and still retain control… In order to avoid mistakes in the course of this operation during the “period of emergency,” it is essential to organize, both in the USSR and abroad, special rapid response groups, staffed by specially trained instructors from the “active reserve” of the KGB of the USSR, as well as by trusted individuals volunteering their cooperation and by individuals who, for one reason or another, have lost their job in the field units or administrative departments of the KGB of the USSR.

He later stated, “The reason for my transfer was the urgent need of the directors of the Administrative Department to create a division capable of coordinating the economic activity of the Party’s management structures in the changing climate… The choice fell to me, since by education I am an international economist [and] I have experience working abroad.”

Having been transferred to the Central Committee, Veselovskiy worked under the supervision of a small group that consisted of Ivashko; Nikolay Kruchina, the CPSU Central Committee chief of the Administrative Department; and KGB chairman Kryuchkov and his deputy director, Filipp Bobkov, who sent a directive to overseas residences that they should immediately submit proposals for the creation of covert KGB commercial firms and financial establishments.

Those in the International Department of the Central Committee and the First Chief Directorate of the KGB, dealing with foreign operations, already had a standard operating procedure for transferring secret funds abroad as a result of their support of foreign Communist parties.

For example, General Nikolay Leonov, who was the deputy chief of the First Chief Directorate, had been in charge of money flows to Latin American countries (as well as having had contact with Che Guevara and interpreting for Khrushchev and Castro). He described the procedure in a subsequent interview:

“Technically it was done in a very simple way. The Central Bank of the State of the Soviet Union handed the money directly to the Central Committee, to the International Relations Department which was responsible for relations with communist parties and national liberation movements. The money was physically taken to the Central Committee and as the final paragraph of these resolutions always said ‘… the KGB is entrusted with carrying out the decision,’ we received the order to collect the money, send it to the corresponding countries and deliver it to its destination.”

The only thing that changed in 1991 was that the KGB and CPSU Central Committee were using this procedure to ensure their own future, not the future of some Latin American Communist party.

Under the supervision of this group, Veselovskiy created a capitalist economy within the CPSU apparatus, establishing joint ventures and bank accounts abroad, both to make money and to hide money. According to a 1991 report, Veselovskiy, who “was assigned to manage Communist Party commercial affairs overseas, told his masters that he had found ways to funnel party money abroad. The stated goal: to ensure the financial well-being of party leaders after they lost power.”

After the August coup Veselovskiy fled the country, first to Canada to link up with a Canadian subsidiary of a Swiss-based firm, Seabeco, and then to Zurich to begin a banking career at one of the very banks he had helped to establish. Kryuchkov was briefly jailed; Kruchina died during the coup after a fall from his apartment window; and Ivashko was briefly general secretary of the CPSU during the August coup but retired in 1992 and died soon after.

However, most of the KGB operatives who had been involved in forming cooperatives at home (many from the KGB’s Fifth Chief Directorate, headed by Filipp Bobkov, or the Sixth Chief Directorate, in charge of economic security and controlling the mafia) or joint ventures abroad (the function of the First Chief Directorate) formed the backbone of the new caste of KGB entrepreneurs who not only set up their own firms but provided security for emerging oligarchs, some of whose greatest profits came from this period.

Bobkov, who joined the KGB during the reign of Lavrentiy Beria in the Stalin period, reportedly took about three hundred of the top operatives of the KGB Fifth Chief Directorate who were responsible for internal order to form the security services for Vladimir Gusinskiy’s Media-Most company. He also is reported to have taken many of the KGB’s personnel files with him.

Aleksey Kondaurov, also a general in the Fifth Chief Directorate, became the head of analysis for Bank Menatep, owned by the Russian oligarch Mikhayl Khodorkovskiy. He conceded that “leaders from all levels of power, from the party nomenklatura to the red directors, were looking for people who would help them deal with the new economic realities… Khodorkovskiy and his group were these new young wolves.”

Khodorkovskiy moved to establish links with the West, but those financial circles recall that when they first met him and his team, the Russians didn’t know how to use a credit card, they didn’t know how to write a check, and they didn’t have money enough to stay even in a hostel.

They were quick learners, but as Anton Surikov, an independent security expert who had previously served in Soviet military intelligence and who knew Khodorkovskiy and those like him in the late 1980s, stated,

“It was impossible to work in the black market without KGB connections and without protection from the KGB. Without them, no shadow business was possible… The creation of the oligarchs was a revolution engineered by the KGB, but then they lost control.“

As to whether Khodorkovskiy’s Bank Menatep was indeed one of the many vehicles used to launder CPSU money, as the legend goes, one of the five major initial shareholders, Mikhayl Brudno, who fled to Israel when Khodorkovskiy was arrested under Putin in 2003, simply said, “It can’t be ruled out that some companies that belonged somehow to the Communist Party were clients, but we were not able to identify them as such.”

Bobkov and Kondaurov were not the only Party or KGB officials who moved to take advantage of the new law on cooperatives and the easing of foreign trade regulations. In November 1991 the magazine Stolitsa reported that two-thirds of the employees of the nascent Russian stock exchange center were ex-KGB officials who were using their new position to launder KGB and CPSU money abroad.

On June 24, 1992, Literaturnaya gazeta published excerpts from a telegram dated January 5, 1991 (No. 174033), which said that in December 1990 KGB chairman Vladimir Kryuchkov had authorized “provisional regulations of a secret operating structure within the organs of the KGB.” The purpose was to “provide reliable protection for leaders and the most valuable [KGB] operatives, in case the internal political situation develops along East German lines; obtain funding for the organization of underground work if ‘destructive elements’ come to power; and create conditions for the effective use of foreign and domestic agents during increased political instability.”

Both General Oleg Kalugin, who had been head of Soviet counterintelligence until 1990, and the Russian journalist Yevgeniya Al’bats have underlined that the KGB really struggled to control the privatization process against the mafia on one side and the “destructive elements” (democrats) on the other. Kalugin subsequently stated that even before Gorbachev came to power, the KGB had placed its people in most Soviet banks abroad, in line with KGB chief Yuriy Andropov’s policy of maneuvering the KGB to promote economic reforms while controlling the process by greater political repression. Conveniently Kryuchkov’s own son was reported to be the KGB rezident (head of station) in Switzerland.

The Russian government lead procurator from the Procurator General’s Office, Sergey Aristov, responsible for Criminal Case No. 18/6220-91, brought against those top officials who carried out the August 1991 coup, claimed that at the beginning of 1991 the CPSU Property Management Department alone had 7 billion rubles ($3.92 billion) in assets. By the autumn of that year, after the coup had failed and the investigation had begun, this 7 billion had largely been disbursed to commercial banks at home and abroad and to 516 businesses established using the Gorbachev-era law on cooperatives.

Of these 516, the largest, according to Aristov, was a “loan” of 300 million rubles ($168 million) to a cooperative society of former KGB officers called Galaktika, or Galaxy. CIA station chief Richard Palmer claims that Galaktika and other KGB-fronted firms received almost 1 billion rubles ($560 million) from Party funds.

Further, Aristov claimed, more than ten commercial banks were established using 3 billion rubles ($1.68 billion) of Party money. He asked, “In the summer of 1991, a giant, finely tuned ‘invisible’ Party economy, corruptly involved to the necessary degree with the current government, went underground… How much did they manage to hide?”

Yel’tsin’s own press secretary, Pavel Voshchanov, similarly charged that the Communists had set up an “invisible party economy” that allowed them to hide money abroad. He also claimed that the Party had used Western credit to support “debt-ridden friendly companies” outside Russia rather than use the money for its intended purpose: to purchase food to prevent shortages during the coming winter.

In another example, Aristov found that a cooperative venture called ANT, which was established by KGB officers reporting to the Council of Ministers and under the protection of Politburo member Yegor Ligachev, had received 30 billion rubles’ ($18.3 billion) worth of bartered materials from a French company in the first half of 1989 alone. The ANT cooperative was the subject of a four-part investigative series by Novaya gazeta in 2008 in which the authors concluded that the ANT deal was one in which, “long before the August coup, the security forces had set out to stop perestroika with tanks.”

The investigation confirmed what was found in the 1992 investigations following the failed August coup: that the KGB had used various means to stymie the emerging democratic movement in Russia.

Novaya gazeta concluded that ANT “employees,” who were in fact KGB officials, put modern battle tanks on flatbeds without proper authorization from the Ministry of Defense, labeled as “means of transportation unsorted.” At the last minute these cooperative workers were to be “caught” trying to illegally export the export-restricted tanks from the country, in this way giving conservative opponents to Gorbachev the ability to hold up these reforms and say, “Look. Admire — Gorbachev’s reforms will destroy Russia.”

Anatoliy Sobchak, who spoke about the scandal in the Congress of People’s Deputies, accused ANT employees not only of planning to provoke a crisis with the “sale” of tanks but also of trying to organize the sale of rough-cut diamonds from the state and of trying to export strategic raw materials worth tens of billions of rubles.

Sobchak’s intervention further bolstered his public persona as a leader of the democratic movement and someone ruthlessly opposed to such KGB tactics. It probably also alerted KGB officials that Sobchak was someone who would, in the future, need to be brought under control, which is where Putin would come in.

As for the money abroad, Procurator Aristov’s team received numerous reports of money flooding out of the country in advance of the August coup, including, for example, $70 million to Finland in one transfer alone. But his investigative efforts were hampered by the reluctance of foreign banks to provide account information without proof of a crime and the unwillingness of “certain circles” within the Russian government to allow investigators carte blanche.

Carlo Bonini and Giuseppe d’Avanzo, the two Italian reporters who later broke the Mabetex story revealing Yel’tsin’s corruption, reported that during this period KGB operatives in particular were working to keep the core of their institution together, since it constituted, in their opinion, the backbone of the entire country.

By their own accounts, top KGB officials felt that unless they coalesced around each other, the country would fall apart. General Leonov, who had been the deputy head of the KGB’s First Chief Directorate in charge of foreign operations, lamented in a 1998 interview that lack of leadership had doomed the USSR from the mid-1970s onward:

“Brezhnev dies, and Andropov takes over, already sick. He is followed by Chernenko, also ill. Then Gorbachev takes office, but he is not a leader, and finally Yel’tsin, the destroyer. In other words, we did not have a leader of national stature.”

While some of these “state people” from the KGB, including Vladimir Putin, according to his own account, may have had a high opinion of Gorbachev’s plans to reform a system they certainly realized was moribund, their highest respect evidently went to Andropov, who as KGB chief and then as Leonid Brezhnev’s successor, had encouraged economic liberalization even as he cracked down on dissent. Now in 1990, with as many as 30 percent of those KGB employees stationed abroad, including Putin, they suddenly found themselves without a job and forced into the “active reserves,” waiting for their next assignment.

A definition of the role, rights, and duties of those members of the active reserves was provided by Valery Shchukin, the deputy governor of Perm oblast’, one of Russia’s regions, in 2000, when Putin’s own status as a member of the active reserves in St. Petersburg also became known.

To be a member of the active reserves “means that a person is not receiving a salary but continues to be on the staff list, has access to operational information, is eligible for promotion, and is obligated to carry out orders from superiors, including secret, confidential orders, without notifying his superiors at the place of civil service.” These were agents with knowledge of foreign languages and cultures and also black banking and black methods; it is not surprising that they sought to establish networks of mutual support.

Many members of the active reserves went into the private sector, setting up banks and security firms. Others, it would appear, formed the backbone of the coup attempt in August 1991. They did this less for their Communist ideals per se than for the Motherland, for the institution of Chekism (loyalty to the idea of an unbroken chain of security services, from Lenin’s Cheka through the KGB to Russia’s new FSB), and for themselves. As General Kalugin stated,

“The KGB is the most stable part of the integrated structure… The structure created to work under any conditions continues to work automatically. Although the processes of peeling away and disintegration are also at work there, for the KGB authorities it is a question of preserving not only the system itself, but themselves. It’s a question of self-defense and survival. The KGB will be one of those structures that will struggle until the end. And that’s the danger.”

But when the August coup failed, the money stayed abroad, where the KGB had easy access to it. And because the CPSU was banned after the coup, the KGB alone now controlled it.

The KGB also established commercial banks in what would soon become the newly independent states of the former Soviet Union, as when a memo authorized Kruchina to transfer 100 million rubles ($56 million) to the new Kompartbank commercial bank in Kazakhstan, possibly with the idea that it would be easier to extract the money from Almaty than from Moscow if the regime collapsed.

Inside Russia, authorities were struggling to put goods in the stores in the absence of old administrative command mechanisms. Gavriil Popov, the mayor of Moscow, freely admitted that this was done by relying on the traditional “trade mafias,” which had previously worked for the Party but now started to function on their own. They came to be known mainly by their ethnic or by their district or regional affiliation — the Azeris, the Chechens, the Solntsevo group in Moscow, the Tambov group in St. Petersburg — and they seized the opportunity to use the new laws permitting commercial activity to legalize their actions and capture market share. But in the absence of the Party and with the collapse of the state, these groups had to provide their own security. Without state-backed law enforcement, violence became the means of enforcing contracts.

At the same time, the trade mafias came into conflict with Party and state officials who were themselves entering the private economy. A former chief procurator who was responsible for bringing dozens of top officials to court for corruption explained, “Former bureaucrats, those who used to run the administrative economic system, have poured into this milieu. They instantly used their connections, spreading metastases in this new fabric. They do everything in order to come more closely and definitively to property. Before, they possessed it indirectly, but now they have the opportunity to possess it directly.”

The trade mafias that were not associated with or protected by former KGB or Party bureaucrats had to provide their own security. This intense competition between former officials and elements from the previous black market was a critical feature of Russian economic transition throughout the 1990s.

Thus Gorbachev’s encouragement to form cooperatives and joint ventures inside the country, combined with the urgent establishment of off-the-books banking structures abroad, created a situation in which cooperatives legally funneled state funds into the private sector, and commercial banks were established abroad to receive these funds.

The comparative advantage of being part of this early cohort cannot be overestimated. In a February 2000 interview with Boris Berezovskiy, one of the major oligarchs close to the Kremlin at that time, I asked whether the billions he was reported to have collected would withstand legal scrutiny, as some in Russia were demanding. His response was intriguing: “Absolutely. I would submit all of my wealth to legal scrutiny. Except for the first million.“

The oligarchs depended on both the ex-KGB and organized crime groups to use targeted violence to control market entry, market share, and border control. The situation was the same in St. Petersburg, Putin’s home city. When the CPSU was legally banned after the August coup, the Leningrad (and then St. Petersburg) Association of Joint Ventures stepped in and took over its controlling shares in the newly formed Bank Rossiya. Thus the comparative economic advantage of these elites as the transition to democracy began.

As I stated previously, after the collapse of the USSR and the failure of the August coup, the Yel’tsin government launched an urgent hunt for the CPSU’s money. They stood little chance of recovering the money; in fact much more started to flow abroad on the established financial pathways, sometimes, but not always, quite discreetly.

The government and Parliament actively aided and abetted capital flight, as when, in February 1992, the Presidium of the Russian Parliament (under the Speaker Ruslan Khasbulatov) passed the resolution On Measures to Stabilize the Financial Situation of Foreign Banks Set Up with Capital of the Former USSR, authorizing the Central Bank to take over all the shares in Western banks set up with Soviet capital and to provide funds as required to stabilize those banks. (The Russian Parliament was able to order the printing of money until after 1993.) These included Moskovskiy Narodniy Bank in London, Donau Bank in Vienna, and branches of Vneshekonombank, among others…

As Procurator General Yuriy Skuratov was to reveal in 1999, in November 1990 the Paris branch of the Soviet State Bank (the predecessor to the Central Bank) had set up an offshore company called Financial Management Company Ltd. (FIMACO) based in the Channel Island of Jersey. According to a 1991 report, Leonid Veselovskiy, the former KGB colonel, had been assigned to funnel the CPSU money abroad. It was as if European Central Bankers, rather than trying to bolster and save the euro, decided to open dollar accounts in the Bahamas using EU funds.

Over the next six years, according to documents provided to Newsweek and in congressional testimony by the former CIA station chief Richard Palmer, the Russian government moved billions of dollars into FIMACO, sometimes also moving the money back to Russia. It was essentially a slush fund for the Kremlin and was used for off-the-books political purposes, including Yel’tsin’s 1996 presidential campaign.

Simultaneously in the early 1990s, trading firms appeared that acted as intermediaries for selling Russian raw materials abroad, receiving materials at state-subsidized “internal prices” but selling them abroad at world market prices. The Russian Parliament established committees to document and stanch this unprecedented outflow of raw material wealth, reported to include “60 tons of gold, 8 of platinum, 150 of silver,” plus an unknown amount of oil, variously estimated between $15 billion and $50 billion. Some estimates were even starker: former prime minister Nikolay Ryzhkov claimed that the gold reserves in January 1990 were 784 tons, but by autumn of that year, Grigoriy Yavlinskiy, Gorbachev’s economic advisor, claimed that number had fallen to 240 tons. After the attempted coup, officials admitted, “A certain amount of gold is missing,” but they were unable to verify the exact amount.

In investigating the loss, the Duma found that hundreds of KGB accounts had been established to transfer assets abroad, flowing from the Politburo decision referred to earlier. The Duma further concluded that at that time no company in partnership with the West would have been able to succeed without a deputy director or local manager from the security services.

Certainly cooperatives that were established quickly came to rely on other cooperatives that were formed of former KGB or MVD personnel who provided security. These new banks also relied on the knowledge of and connections to Russian and international organized crime, as well as former KGB operatives who had knowledge of foreign banking operations and rules.

As this discussion has shown, it can generally be concluded that anyone who was establishing cooperatives and succeeding at it in the late Gorbachev period had either KGB or Komsomol cover or krysha.

…

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footnote

[1] U.S. government anonymous leaks in 2014 claimed that Putin had spent illicit funds since the early 2000s on the unrivaled acquisition of luxury items, including his twenty presidential residences; that he had siphoned off cash from Gazprom to the tune of 70 percent of its capital expenditures; and that he controlled an estimated 4.5 percent of Gazprom, 37 percent of shares in Surgutneftegaz, and 50 percent of Gunvor. See Bill Gertz. “Putin Corruption Network Revealed,” Washington (DC) Free Beacon, April 7, 2014, freebeacon.com/national-security/putin-corruption-network-revealed/.