Читать книгу Londongrad: From Russia with Cash; The Inside Story of the Oligarchs - Mark Hollingsworth - Страница 7

‘What is hard to dispute is that, while hundreds of people became seriously rich, 150 million Russians now live in a country which sold its mineral wealth for a mess of pottage’¹

- DOMINIC MIDGLEY and CHRIS HUTCHINS, 2005

IN 2002 THE RUSSIAN FILM Oligarkh was released. Its main character, Platon Makovsky (Platon is the Russian name for Plato), was a young, idealistic academic who abandoned his studies for the shady world of post-Soviet-era business. Platon devised a series of questionable deals by which he outfoxed his opponents: the Russian secret service. First, he rapidly became the richest man in Russia with financial and political power equal to the state. Then he ended up as the government’s rival and sworn enemy.

Set during the economic convulsions that followed the collapse of communism, Oligarkh was a graphic, if fictional, account of a small group of businessmen who acquired the nation’s wealth. But the film also presented the characters as visionaries who provided the lifeblood of a country paralyzed by fear of change. As the New Yorker noted:

Once a freedom-loving idealist, Platon used his genius to become a monster, unhesitatingly sacrificing his ideals and his closest friends. This is the tragedy of this super-talented individual who embodies all that is most creative in the new Russia and, at the same time, all which is worst for the country that he privatised for his own profit.²

Based on the novel Bolshaya Paika (The Lion’s Share) written by Yuli Dubov, who went on to work for Berezovsky, the film broke Russian box-office records and drew gasps from the audience at the scenes of obscene private opulence. It has been broadly compared to the early years of one of the country’s most notorious oligarchs: Boris Berezovsky. Played by Russian sex symbol Vladimir Mashkov, the leading character was portrayed sympathetically as a freedom-loving patriot who proclaimed at one point that he would rather go to jail than leave Russia.

Although there were scenes of armed standoffs, the plot mostly glossed over the methods by which such a small clique made such huge fortunes so quickly. Berezovsky accepted that the film was based - if somewhat loosely - on his own early life. He invited the director to his London home for a viewing of the film and told the BBC, ‘As a work of art I think it is primitive. But I appreciate the effort to understand people like me. It is the first attempt in recent Russian cinema to understand the motivations of those at the peak of power, who drive reforms and make changes rather than cope with them.’³

As they started to beat a path to London, and as their reputations grew, so the new breed of super-rich Russians began to intrigue the British public: ‘We like to follow them because we are astonished at how people who not that long ago were queuing for bread are now able to outbid the rest of the world’s super-rich for Britain’s finest houses,’ one Mayfair property agent told us.

In his early sixties, Berezovsky is old enough to remember the bread queues in his own country, but such a modest lifestyle did not extend into his adult years. The man once known as the ‘Grey Cardinal’ because of his dominating influence at the Kremlin was not shy when it came to spending his fortune. In 1995 he bought himself a palatial residence outside Moscow, complete with servants, and accumulated a fleet of sports cars. He acquired an interest in fine wine and smoked only the best cigars. His brazen lifestyle soon became the stuff of legend. Here was a man with a way of life that had once been the province only of the Russian aristocracy before the Revolution.

With an estimated fortune of £1.5 billion at the time, he epitomized the term ‘Russian oligarch’. His power was such that by the autumn of 1996 he could boast that he and six other individuals controlled 50 per cent of the Russian economy.⁴ Berezovsky was exaggerating, but from the early 1990s Russia was quickly transformed from a highly centralized economy to one in which some thirty or so individuals owned and controlled the commanding heights: its vast natural resources and manufacturing. Russia moved at high speed from being a political dictatorship to a society not just heavily owned by a tiny, super-wealthy elite, but one wielding, for a while, enormous political power.

The word ‘oligarch’ was first used in Russia on 13 October 1992, when Khodorkovsky’s Bank Menatep announced plans to provide banking services for what it called ‘the financial and industrial oligarchy’. This was for clients with private means of at least $10 million. By the mid-1990s, the word was common parlance across Russia.

The origins of the word lie in Classical Greek political philosophy. Both Plato’s Republic and Aristotle’s Politics describe rule by an elite rather than by the democratic will of the people. Historically, ‘oligarch’ was a word used to describe active opponents of Athenian democracy during the fifth century bc, when Greece was ruled on several occasions by brutal oligarch regimes that butchered their democratic opponents.

Like their ancient Greek counterparts, few of the modern Russian oligarchs became mega-rich by creating new wealth but rather by insider political intrigue and by exploiting the weakness of the rule of law. Driven by a lust for money and power, they secured much of the country’s natural and historic wealth through the manipulation of the post-Soviet-era process of privatization.

When Boris Yeltsin succeeded Mikhail Gorbachev as President in 1991, Russia had reached another precarious stage in its complex history. It had difficulty trading its vast resources and was short of food, while its banking system suffered from a severe lack of liquidity. Its former foe the United States - in Russia referred to as glavni vrag (the main enemy) - was watching events eagerly. Within weeks, advisers from the International Monetary Fund (IMF) and the World Bank teamed up with powerful Russian reformist economists close to the Kremlin to persuade Yeltsin to introduce an unbridled free-market economy involving the mass privatization of state assets. It was a dramatic process of ‘reverse Marxism’ implemented at speed.

This was to become Russia’s second full-scale revolution - though this time from communism to capitalism - in three generations. ‘Russia was broke. There was grave doubt in late 1991 that they could feed their population in the coming year,’ explained James Collins, former US Ambassador to Russia.’The government had lost control over its currency because people were printing it in other republics. The policy of what became known as “shock therapy” was discussed internally [in the US government] and nobody stood up and said “no, don’t do that”. The whole system was falling apart and was best summed up by my predecessor Ambassador Robert Strauss who said, “It’s like two pissants on a big log in a middle of a river going downstream and arguing about who was steering”.’

The first wave of privatization came in the form of a mass voucher scheme launched in late 1992 - just nine months after Yeltsin assumed the presidency. All Russians were to be offered vouchers to the value of 10,000 roubles (then worth about $30, the equivalent of the average monthly wage). These could, over time, be exchanged for shares either in companies that employed them or in any other state enterprise that was being privatized. To acquire the vouchers, citizens had to pay a mere 25 roubles per voucher, at the time the equivalent of about 7 pence.

In the four months from October 1992, a remarkable 144 million vouchers were bought, mainly in agricultural and service firms. The Kremlin presented this ambitious scheme as offering everyone a share in the nation’s wealth. Yeltsin promised it would produce ‘millions of owners rather than a handful of millionaires’. It may have been a great vision but it never materialized. Russia’s citizens were poor, often unpaid, and many had lost their savings as inflation soared and the rouble collapsed. Moreover, after seventy years of communism, most Russians had no concept of the idea of share ownership. There wasn’t even a Russian word for privatization.

There were, however, plenty of people who understood only too well what privatization meant and the value of the vouchers. They started buying them up in blocks from workers. Among those cashing in was Mikhail Khodorkovsky - who would later become the richest man in Russia. Street kiosks selling vodka and cigarettes began doing a brisk trade in vouchers. Stalls began to appear outside farms and factories offering to buy them from workers. Hustlers started going from door to door.

Even though holders were being offered far less than the vouchers were worth, most exchanged them for cash to pay for immediate necessities. Russia became a giant unregulated stock exchange as purchasers were persuaded to trade their vouchers for prices that were nearly always well below their true value. They would exchange them for a bottle of vodka, a handful of US dollars, or a few more roubles than they had paid for them. It proved a mass bonanza for those prepared to prey on a country suffering from mass deprivation.

Hundreds of thousands also lost their vouchers in ‘voucher saving funds’. Some funds were little more than covert attempts by companies to buy up their own shares for a song. Members of the old KGB power elite often laid claim to mines and enterprises in what became known as ‘smash-and-grab’ operations. For a nation ignorant of the concept of shares and unable to appreciate the potential value of their vouchers, people were easily encouraged to part with their stakes. For the winners it was easy and big money.

Instead of a share-owning democracy, a newspaper poll in July 1994 revealed that only 8 per cent of Russians had exchanged their vouchers for shares in enterprises in which they worked. Moreover, because the assets being sold were massively undervalued, the successful purchasers obtained the companies for well below their real value. Indeed, the 144 million vouchers issued have been estimated to have valued the assets at a mere $12 billion. In other words, much of the country’s industrial and agricultural wealth was being sold for a sum equivalent to the value of a single British company such as Marks & Spencer.

In just two years, by the beginning of 1995, around half the economy, mostly in the shape of small- and medium-sized businesses, had been privatized. The next crucial issue in the ‘second Russian Revolution’ was how to privatize the remaining giant state-owned oil, metallurgical, and telecommunications industries that were still operated by former Soviet managers - the ‘red directors’, the Soviet-era bosses renowned for their corruption and incompetence who had managed the state firms - many of whom were laundering money and stashing away revenue abroad. Russia was still mired in a severe economic crisis with plunging share prices and rampant inflation. The indecisive and capricious Yeltsin was ill, often drunk and rarely in control, while the state was running out of money to pay pensions and salaries.

Taking advantage of the growing crisis, a handful of businessmen dreamed up a clever ruse that appeared to offer a solution. This was a group that had already become rich by taking advantage of the early days of Mikhail Gorbachev’s perestroika (restructuring), which, for the first time in the Soviet Union, allowed small private enterprises to operate. Led by a leading insider, Vladimir Potanin, the cabal offered Yeltsin a backroom deal known in the West as ‘loans for shares’. This was an arrangement (coming at the end of the voucher privatization scheme) whereby they would lend the government the cash it so desperately needed in return for the right to buy shares in the remaining state enterprises. In effect, Yeltsin was auctioning off the state’s most desirable assets. If the government subsequently defaulted on repaying the loans - which the scheme’s architects knew was inevitable - the lenders would keep the shares by way of compensation.

For Yeltsin, the plan provided much needed cash while on paper it did not look like the mass giveaway it turned out to be. Between 1995 and 1997, more than twenty giant state-owned enterprises, accounting for a huge share of the country’s national wealth, were offloaded in this way. In return, the government received a total of some 9.1 trillion roubles, about £1.2 billion at the time. One of the main beneficiaries of this deal was Boris Berezovsky.

Boris Abramovich Berezovsky was born in Moscow in January 1946 to a Jewish family. An only child, his father was a construction engineer and his mother a paediatric nurse. Berezovsky’s family were not members of the Communist Party and his upbringing was modest and for a time - when his father was unemployed for two years - he experienced poverty. ‘I wasn’t a member of the political elite,’ he later said. ‘I am a Jew. There were massive limitations. I understand that perfectly well,’ he told an audience of journalists at London’s Frontline Club in London in June 2007.

A mathematics whizz kid, Berezovsky graduated with honours from Moscow State University. In early 1969 he joined the Institute of Control Sciences, where he gained a PhD and worked for more than twenty years. Intelligent, precocious, and energetic, he is also remembered for being intensely ambitious. ‘He always raised the bar to the highest notch and went for it,’ a close colleague recalled. ‘He was always in motion, always racing towards the goal, never knowing or fearing obstacles…His mind was always restless, his emotions ever changing, and he often lost interest in what he had started.’ Another friend from this period said, ‘He has this attitude which he has maintained all his life - never stop attacking.’

This was corroborated by a fellow student, ‘He was a compressed ball of energy…Constantly in motion, he was burning with plans and ideas and impatient to make them happen. He had an insistent charm and a fierce burning desire and he usually got what he wanted.’

As a scientist, Berezovsky wrote more than a hundred research papers on such subjects as optimization theory and decision-making. He was a director of a laboratory that researched automation and computer systems for industry. The young mathematician craved prestige and focused his energy on winning prizes to get it. He was awarded the prestigious Lenin Komsomol Prize (an annual Soviet award for the best works by young writers in science, engineering, literature, and the arts) and then tried but failed to win the even more illustrious State Prize. According to Leonid Boguslavsky, a former colleague at the Institute, his dream was to win the Nobel Prize.

In 1991 Berezovsky left academia and was appointed a member of the Russian Academy of Sciences, an achievement he remains proud of to this day. He later boasted that there were only eight hundred members of the Russian Academy of Sciences and that even Leonid Brezhnev had wanted to be among that number.

Berezovsky married Nina Vassilievna when he was twenty-three. Within three years the couple had two daughters - Elizaveta and Ekaterina, both now in their thirties. Despite his academic achievements, Berezovsky initially had to scrimp to buy winter tights and school exercise books for his children. Perestroika offered him escape from his straitened circumstances. His first scheme involved selling software he had developed to the State Committee on Science and Technology. ‘We convinced them that it was a good product, and we sold tens of thousands of copies of this software. And those were the first millions of roubles that we earned, and a million roubles was a whole lot,’ he told his audience at the Frontline Club.

In 1989 Berezovsky turned to the automobile industry. ‘They stopped paying my salary, so I started a business,’ he recalled. ‘Every Russian had two wishes - for an apartment and a car. The women generally had the last say on the apartment; so I went into cars.’⁵ Initially, this involved selling second-hand Mercedes imported from East Germany. Then, taking advantage of the new freedom to travel, he went to West Germany. There he bought a used Mercedes, drove it back through almost non-existent customs, and sold it for three times what he had paid for it.

But the real source of Berezovsky’s early wealth came from exploiting his connections, gained through his academic work, with the Soviet Union’s largest car manufacturer and producer of the Lada, the AvtoVaz factory based in the industrial city of Togliatti. Off the back of his friendship with the factory’s Director, Vladimir Kadannikov, Berezovsky founded a company called LogoVaz, which took over responsibility for selling the Ladas. The effect was to separate production from sales in a way that maximized the profits from the business for Berezovsky and his partners. It was perfectly legal and it was a strategy widely deployed by directors of state companies and the new entrepreneurs at the time.

Berezovsky also went on to establish the country’s first chain of dealerships for Mercedes, Fiat, and Volvo, which he later referred to as ‘a complete service, with workshops, showrooms, and credit facilities. Really, we created the country’s car market. There was no market then; people won cars in lotteries or for being “best worker” or they applied and stayed on a waiting list for years.’⁶

In relation to that waiting list, Russians have a joke about the long delays of the period. Vladimir has been waiting for six years to buy his own car, when he is suddenly summoned to the local ministry office. ‘I have good news for you,’ says the clerk. ‘Your car will be delivered to you in five years from today.’

‘Wonderful,’ says Vladimir. ‘Will it come in the morning or the afternoon?’

‘Why, what difference does it make?’ responds the perplexed clerk.

‘Well,’ answers Vladimir, ‘I have already arranged for a plumber to come that morning.’

The dealership chain was created at a time when the automobile industry was rife with organized crime and protection rackets. Berezovsky’s Moscow dealership was targeted by Chechen gangs, which also controlled the production lines at AvtoVaz. Berezovsky, at times personally a target of the gangs, has always denied any mafia connection. In September 1993 his LogoVaz car parks were attacked three times and his showrooms bombed with grenades. When his Mercedes 600 sedan was blown up nine months later, with Berezovsky in the back and his chauffeur killed, LogoVaz issued a statement blaming ‘forces in society that are actively trying, by barbarically criminal means, to keep civilian entrepreneurship from developing in this country.’

I can tell you right here and now that not a single oligarch has bowed to the Mafia. Oligarchs themselves are stronger than any mafia, and stronger than the government, to which they have also refused to bow. If we are talking of the visible tip of the iceberg, not the part of the iceberg concealed behind the surface or in the dark, I haven’t bowed to the government either.⁷

By 1993 Berezovsky had already built an extensive business empire. One of his new enterprises was the All-Russian Automobile Alliance. Owned by various companies but headed by Berezovsky, ARAA promised the production of a ‘people’s car’, to be produced by AvtoVaz in collaboration with General Motors in the United States. On the back of a huge advertising campaign, it offered bonds in the scheme and the promise of cheaper cars, cash redemption, and a free lottery once the new production line was up and running. Wooed by the ‘get-rich-quick’ promise, more than 100,000 Russians bought $50 million of shares in the project. But when General Motors backed out of the scheme and it collapsed, thousands lost their money.

By now Berezovsky had acquired a younger, second wife, Galina Becharova. They lived together for several years before being married at a civil ceremony in Russia in 1991. They had a son, Artem, and a daughter, Anastasia. Although they separated three years later, they never divorced. Berezovsky sent his two daughters from his first marriage - Elizaveta and Ekaterina - to Cambridge University.

By 1995 AvtoVaz had terminated the LogoVaz contract. The ambitious oligarch turned his attention from cars to planes, lobbying to install his business associates in key managerial positions in the state-owned airline, Aeroflot. Thanks to his growing influence at the Kremlin, he ensured that two of his intermediary companies based in Switzerland - Andava and Forus - provided Aeroflot with financial services. This gave Berezovsky huge influence over the company.

Much of Berezovsky’s business ascendancy was based on his Kremlin connections and personal friendship with President Yeltsin. Since coming to power as Russia’s first democratically elected leader following his resistance against the hardliners’ putsch of 1991 (it had toppled Gorbachev and was bent on restoring a Soviet-style dictatorship), Yeltsin seemed to relax. But gradually he became increasingly impatient, drank more, and appeared ever vulnerable to the solicitations of sycophants and businessmen, especially as he distrusted the old KGB machine.

Berezovsky’s relationship with Yeltsin was cemented by his shrewd offer to finance the publication of the President’s second volume of memoirs, Notes of a President, in 1994, arranging for royalties to be paid into a Barclays bank account in London. According to one account, before long, the President was complaining that the royalties were too low. ‘They [the ghostwriter, Valentin Yumashev, and Berezovsky] understood that they had to fix their mistake,’ claimed General Aleksandr Korzhakov, former KGB officer and Yeltsin’s closest friend and one-time bodyguard. ‘They started filling Yeltsin’s personal bank account in London, explaining that this was income from the book. By the end of 1994, Yeltsin’s account already had a balance of about $3 million.’⁸

A grateful Yeltsin ensured that Berezovsky became part of the Kremlin inner circle. Already a multi-millionaire, he was now well placed to benefit from the next wave of state sell-offs. In December 1994 Yeltsin signed a decree that handed over a 49 per cent stake in ORT, the main state-owned television station and broadcaster of Channel One, primarily to Berezovsky, without the auction required by law. The remaining 51 per cent remained in state hands. Berezovsky paid a mere $320,000 for the station. As most Russians get their news from the television, this also provided Berezovsky with a vital propaganda base for dealing with the Kremlin.

But perhaps Berezovsky’s biggest prize was in oil. In December 1995 he acquired a claim, via the ‘loans for shares’ scheme, to the state-owned oil conglomerate Sibneft (Siberian Oil) - then Russia’s sixth-largest oil company - for a cut price of $100 million, a tiny fraction of its true value. The deal was done with two associates. One was his closest business partner, the ruthlessly sharp Arkady ‘Badri’ Patarkatsishvili, the other was the then unknown Roman Abramovich, twenty years younger than Berezovsky but canny enough to find $50 million for a 50 per cent stake. It was from this moment that Abramovich, at first under his mentor’s tutelage but then through his own business acumen, manipulated his way to a billion dollar fortune founded on cunning negotiating skills and political patronage. It was a relationship that Berezovsky would later bitterly regret.

If there is a key to Abramovich’s relentless drive, it is the orphan in him. He was born in 1966 to Irena and Arkady, Jewish Ukrainians living in Syktyvkar, the forbidding capital of the Komi republic in northern Siberia. He lost both parents before the age of three: his mother died of blood poisoning following an abortion and his father was felled by an errant crane on a building site. Roman was adopted by his Uncle Leib and his wife Ludmilla, a former beauty queen. The family lived in the industrial city of Ukhta, where Leib was responsible for the supply of essentials to the state-owned timber business. Roman enjoyed a relatively comfortable upbringing and was, it is said, the first boy in his area to have a modern cassette player.

In 1974 Roman moved to Moscow and lived with his uncle Abram, a construction boss, who would become his surrogate father. Although they lived in a tiny two-room apartment, it lay in the heart of the capital on Tsvetnoi Boulevard, just across from the Central Market and the Moscow Circus. The young Roman did not excel at school and in 1983 was called up for national service in the Red Army and posted to an artillery unit in Kirzach, 50 miles north-east of Moscow.

On his return to the big city, Abramovich was guided and protected by his uncle in the ways of the grey market economy of perestroika. It was not unusual for ordinary Russians to indulge in smuggling and black marketeering and, despite his shyness, the young Abramovich did not hold back. He had honed his skill in the army. ‘Roman was head and shoulders above the rest when it comes to entrepreneurship,’ recalled Nikolai Panteleimonov, a former army friend. ‘He could make money out of thin air.’

When Abramovich was discharged from the army, he studied highway engineering and then returned to the secondary economy: transporting luxury consumer goods like Marlboro cigarettes, Chanel perfume, and Levi and Wrangler jeans from Moscow back to Ukhta.

In 1987 the budding entrepreneur met his first wife, Olga Lysova, the daughter of a high-ranking government diplomat. The couple married that December in a Moscow registry office in the presence of fifteen family and friends. The following year Abramovich established a company that made toys - including plastic ducks - and sold them in the Moscow markets. He also bought and sold retreaded tyres. An intuitive negotiator, he was able to put customers at ease. He was soon earning three to four thousand roubles a month - more than twenty times the salary of a state worker - and could afford to buy a Lada.

In 1989 Abramovich and his first wife divorced. Olga says her husband persuaded her that they should divorce so that they could emigrate to Canada together, claiming that the immigration laws made it easier for him to go there if he was not married. Once he was a Canadian citizen, he would come back for Olga and her daughter from a previous relationship. Instead, Abramovich left Olga and gave her enough money to live on for two years, although she later claimed that all she got was the ‘crummy flat’.⁹ A year later Abramovich married Irina Malandina, an air hostess with Aeroflot. They met on one of his business flights and in 1992 their first child, Anna, was born.

When the Soviet Union collapsed, Abramovich, who had attended the Gubkin Institute of Oil and Gas in Moscow, established an oil-trading firm called ABK, based in Omsk, the centre of the Siberian oil business. In post-communist Russia it was possible to make enormous profits by buying oil at controlled domestic prices and selling it on in the unregulated international market. All that was needed was an export licence, which Abramovich acquired through his connection with a customs official.

It was his friendship with Boris Berezovsky that transformed Abramovich from a hustler and mid-level oil trader into a billionaire. The two men first met at a New Year’s Eve party in 1994 on board the luxury yacht belonging to Petr Aven, a wealthy banker and former state minister. The select gathering of guests had been invited on a cruise to the Caribbean island of St Barts. Berezovsky was impressed by Abramovich’s technical know-how and his unassuming manner that belied a calculating intelligence. Casually dressed and often with a few days’ growth of beard, his understated, gentle demeanour and apparently unthreatening manner often resulted in fellow businessmen underestimating him.

In stark contrast to his mentor, with his hyperactive, restless personality, Abramovich comes across as a chess player, thinking deeply through all the possible permutations on the board. Berezovsky later acknowledged that, of all the businessmen he had met, Abramovich was the best at ‘person-to-person relations’.¹⁰

Spotting the young oil trader’s commercial nous, Berezovsky recruited him as a key partner in the Sibneft deal. This conglomerate had been created from four state-owned enterprises: an oil and gas production plant, Noyabrskneftegas; an oil exploration arm, Noyabrskneftegas Geophysica; a marketing company called Omsknefteproduckt; and, most important of all, Russia’s largest and most modern oil refinery at Omsk.

The three partners responsible for the acquisition of Sibneft all played different but key roles. Abramovich assessed Sibneft’s business potential, Berezovsky smoothed the privatization with the Yeltsin administration, and Badri Patarkatsishvili organized half the financing. In late 1995, 49 per cent of the company was sold at auction to the three men through their Petroleum Financial Company, known as NFK. The majority 51 per cent stake was to be held by the state for three years while the lenders were allowed to manage the assets. Under the plan, if the loan was not repaid within three years, legal ownership would transfer to the lenders. In the event, most of the remaining 49 per cent was auctioned a short while later, in January 1996, with control going to Berezovsky and his associates.

When ownership of Sibneft was secured, Berezovsky was already consumed by Kremlin politics and Patarkatsishvili was running ORT. It was thus agreed that Abramovich would manage the new company. According to Berezovsky Abramovich was in essence holding their shares in trust for both the other partners.

October of 1998 saw the deadline for the state’s repayment of the loan; as expected, it was not met. Ownership of Sibneft therefore passed to NFK. By now, Abramovich held, on paper, the lion’s share of the oil giant through various companies. At thirty-two, he was well on his way to becoming one of Russia’s richest men. All decisions during the process of acquisition by the three partners in the deal - Abramovich, Berezovsky, and Patarkatsishvili - were made mostly at meetings at which only the three men were present and no minutes were taken. Nothing was ever formally put in writing and there was little or no documentation. The absence of a paper trail was deliberate - as was so often the way with many of the power-broking deals of the period - and it was partly for this reason that who actually owned what was later to become the subject of a bitter feud between Berezovsky and Abramovich. Many of the deals that forged the transfer of Russia’s wealth were concluded in this way - in shady rooms with no independent witnesses, tape recorders, or documentation, all done on the basis of a handshake. Unsurprisingly, many of these remarkable agreements started to unravel, as the former business allies later became bitter rivals and enemies.

Meanwhile, one of Berezovsky’s oligarchic rivals was an earnest, geeky former mathematician named Mikhail Khodorkovsky. As early as 1989, he was wealthy enough to found his own bank and would also become a billionaire through the privatization of state assets. Mikhail (’Misha’) Borisovich Khodorkovsky, an only child, was born in Moscow in June 1963 to a lower-middle-class family with a Jewish father and a Christian mother. In his early years the family lived in cramped communal housing, though circumstances later improved when his father was promoted.

Khodorkovsky’s nursery school was next door to the factory where his father worked and he remembers climbing the fence with his friends to steal pieces of metal. It was Misha’s dream from an early age to become a director of a factory and the other children at his nursery school accordingly nicknamed him ‘Director’. Khodorkovsky left school in 1981 and read chemistry at the Mendeleev Institute of Chemical Technology in Moscow, specializing in the study of rocket fuel. He supported his studies by working as a carpenter in a housing cooperative and it was at university that he met his first wife Elena, a fellow student.

Their first son, Pavlik, was born in 1985 and the young scientist grimly recalls going out at six o’clock every morning with ration coupons to buy baby food. Khodorkovsky graduated from the Mendeleev Institute at the top of his year in 1996. Although his earliest ambitions to work in defence were thwarted by the fact that he was a Jew, he became the Deputy Secretary of Moscow’s Frunze district Komsomol - the Young Communist League. Like many Komsomol leaders, he used the organization’s real-estate holdings and political connections to profit from perestroika.

In 1986 Khodorkovsky met his second wife Inna and set up the Centre for Scientific and Technical Youth. Purportedly a youth group, the Centre was merely a front for their commercial activities. ‘He dealt in everything: blue jeans, brandy, and computers - whatever could make money,’ recalled a former senior Yukos executive.¹¹ Khodorkovsky and his colleagues peddled new technologies to Soviet factories, imported personal computers, and sold French brandy. Leonid Nevzlin, who became his closest business associate, recalls that all this was done with the backing of the Communist Party: ‘To a certain extent, Khodorkovsky was sent by the Komsomol and the party [into the private sector].’¹²

By 1987 Khodorkovsky’s enterprises boasted many Soviet ministries as clients, employed 5,000 people, and enjoyed annual revenue of eighty million roubles. Later that year the Komsomol’s central committee gave its organizations the authority to set up bank accounts and raise and spend their own money. Pouncing on this opportunity, the perspicacious Khodorkovsky set up Bank Menatep. The bank soon expanded and by 1990, a year before the fall of communism, it was even setting up offshore accounts, seven years before he hired the lawyer Stephen Curtis.

After Yeltsin came to power, Khodorkovsky soon came to appreciate the value of connections. He started courting senior bureaucrats and politicians, holding lavish receptions for high-level guests at top clubs in Moscow as well as at smart dachas owned by Menatep on the Rublevskoye Highway, the exclusive residential area to the west of the capital. By 1991, he was an adviser to the Russian Prime Minister Ivan Silaev. For a brief spell, he was a deputy fuel and energy minister.

One of Yeltsin’s early market reforms was to end the Central Bank’s monopoly of banking for government institutions. Those entrepreneurs who had already set up banks were well placed to take advantage of this relaxation of the rules. Russia then, as now, was a country where little happened unless a bribe was paid - vzyat or kapusta as it is called in Russian. In the case of the transfer of deposits, it was widely alleged that the banks that paid the biggest bribes to high-level politicians and state officials would receive the wealthiest new clients. And the payments were often deposited offshore. According to Bill Browder, an American banker who set up Hermitage Capital Management, one of the largest funds investing in Russia, ‘These entrepreneurs would set up banks and in many cases would go to government ministers and say, you put the ministries on deposit in my bank and I’ll put five or ten million bucks in a Swiss bank account with your name on it.’¹³

The paybacks offered entry into the highly lucrative business of handling state money. By 1994, Menatep was responsible for funds collected for the victims of the Chernobyl disaster of 1986 as well as the finances of Moscow’s city government and the Ministry of Finance itself. At thirty-one and by now a multi-national tycoon, Khodorkovsky hired the accountancy firm Arthur Andersen to audit his books and spent $1 million on advertisements in the New York Times and the Wall Street Journal. His office was an imposing Victorianstyle castle in central Moscow with huge bronze letters announcing its presence and surrounded by a tall wrought-iron fence with sharp spikes. The grounds swarmed with armed security guards, some in well-tailored suits, others in black uniforms and boots.

Flush with cash, Khodorkovsky was now able to target the industrial enterprises next in line to be sold off. It was the sale of the vast Siberian oil company Yukos, in what was a remarkably profitable deal that was to turn Khodorkovsky into a super-rich international tycoon. The process of transfer of vast state industries via the ‘loans for shares’ scheme was supposed to be handled by open auctions. In reality they were nothing of the sort. Only select bidders were invited to tender, and in many cases the auctions were actually controlled by the very people making the bids - sometimes using companies to disguise their identity.

In the case of Yukos, it was Khodorkovsky’s Menatep that was in charge of processing the bids in the auction. In a hotly contested auction, higher bids were disqualified on ‘technical grounds’ and Khodorkovsky won the auction. In this way he and his partners acquired a 78 per cent stake in Yukos and 2 per cent of the world’s oil reserves for a mere $309 million. When the shares began trading two years later in 1997, Yukos’s market capitalization was worth thirty times that figure. One by one, the state’s industrial conglomerates were being sold off at ‘liquidation-sale prices’ according to Strobe Talbott, former US Assistant Secretary of State.¹⁴

It was a pattern repeated in the other auctions. The Sibneft auction for example, was managed by NFK. In most cases there was ultimately only one bidder. In some instances the auction was not even won by the highest bidder.

The ‘loans for shares’ scheme turned many of the buyers from rouble multi-millionaires into dollar billionaires almost overnight. Initially, the lenders acquired only a proportion of the assets, but over the next couple of years the government also sold off the remaining tranches of shares in a series of lots, again without the competitive bids and auctions promised, and with the original lenders securing the remaining shares for themselves.

By now ordinary Russians had lost patience with the process of privatization. The economy was in tatters, few had benefited from the voucher fiasco, while many had ploughed their savings into schemes that had simply swallowed up their money. There was widespread disbelief that a few dozen political and business insiders were walking off with Russia’s industrial and mineral wealth at cut prices. Disillusioned with the President and his policies, ordinary Russians began to exhibit a yearning for what they saw as the security and stability of communism. There was suddenly a real prospect that the shambolic, drunken Yeltsin would lose the forthcoming election in 1996 to the revitalized Communist Party candidate Gennady Zyuganov.

Opinion polls recorded Yeltsin’s popularity at a derisory 6 per cent. ‘It’s all over,’ said one American diplomat in Moscow. ‘I’m getting ready for Yeltsin to go.’¹⁵ Promising to stop the auctions for the remaining shares, Zyuganov fully intended to pursue the oligarchs. At the time the international investor and philanthropist George Soros, now one of the oligarchs’ greatest critics, warned Berezovsky somewhat acidly that if the communists were to win, ‘you are going to hang from a lamppost’.¹⁶

Berezovsky was only too aware that he had enemies among the communists. At a secret meeting in Davos in the Swiss Alps during the World Economic Forum in February 1996, he galvanized the wealthiest businessmen known in Russia as ‘the Group of Seven’. They agreed to bankroll Yeltsin’s election campaign in return for the offer of shares and management positions in the state industries yet to be privatized.

The seven parties privy to the ‘Davos Pact’ were mainly bankers - Mikhail Khodorkovsky, Vladimir Potanin, Alexander Smolensky, and Petr Aven, as well as media tycoon Vladimir Gusinsky, industrialist Mikhail Fridman, and, of course, Berezovsky himself.

Television was the key to the election campaign. The campaign was bankrolled through a secret fund known as the Black Treasury. Money was spent cultivating journalists and local political bosses. But most was used to pay for flattering documentaries of Yeltsin shown on private TV stations, billboards put up by local mayors, and even on pro-Yeltsin rock concerts. And Berezovsky brazenly used his ownership of Channel One, Russia’s most powerful television network, to lionize Yeltsin and attack his communist opponent.

Central to the campaign were Western spin doctors. Tim (now Lord) Bell, the media guru who had helped Margaret Thatcher win three elections in Great Britain between 1979 and 1990, was hired. Bell had also worked closely with the campaign team responsible for California Governor Pete Wilson’s remarkable comeback election victory in 1994, just two years earlier. In conditions of secrecy likened to protecting nuclear secrets, the American image consultants Dresner-Wickers moved into Suite 120 of the President Hotel in Moscow. ‘Secrecy was paramount,’ recalled Felix Braynin, a Yeltsin aide. ‘Everyone realized that if the Communists knew about this before the election, they would attack Yeltsin as an American tool. We badly needed the team, but having them was a big risk.’¹⁷

Working closely with Yeltsin’s influential daughter Tatyana (Tanya) Dyachenko, who was based next door in Room 119, the Americans were treated like royalty. They were paid $250,000 plus expenses and enjoyed an unlimited budget for polling, focus groups, and research. They were told that their rooms and phones were bugged and that they should leave the hotel as infrequently as possible.

The Americans suggested employing dirty tricks such as trailing Zyuganov with ‘truth squads’, which would heckle him and provoke him into losing his temper, but mostly they campaigned in a politically orthodox style. Photo opportunities and TV appearances were organized so as to appear spontaneous. Focus groups, direct mailing, and opinion polls were also widely employed, and the election message was hammered home repeatedly: ‘Whatever it is that we are going to say and do, we have to repeat it between eight and twelve times,’ said one of the American political consultants.¹⁸

Yeltsin proved to be an adept, populist campaigner. He smiled more and was even inspired to get on stage at a rock concert and do a few moves. From facing the political abyss, Yeltsin was re-elected with a 13 per cent lead. It was a staggering result and with it the newly enriched oligarchs had protected their fortunes and their power base. ‘It was a battle for our blood interests,’ acknowledged Berezovsky.¹⁹

The now all-powerful Berezovsky had proved a master manipulator. When asked about his influences, he rejected Machiavelli in preference to Lenin. ‘Not as an ideologue,’ he remarked, ‘but as a tactician in political struggle. Nobody had better perception of what was possible…Lenin understood the psychology of society.’²⁰

It was now payback time and Yeltsin kept his part of the deal: some oligarchs received huge new government accounts, bought more state assets on the cheap, and paid only minimal taxes. In his memoirs, Strobe Talbott described the deal in the run-up to the presidential elections as a ‘Faustian bargain in which Yeltsin sold the soul of reform’. But the Russians replied that the favour they were doing the oligarchs was nowhere near as bad as the communist victory it helped to avert. As they saw it, unlike Dr Faustus who made a pact with the Devil that guaranteed his damnation, Yeltsin had made an accommodation with what he was convinced was the lesser of two evils - a deal that would help Russia avoid the real damnation of a return to power by the communists.’²¹

Some of the oligarchs, notably Abramovich and Berezovsky, formed a coterie around Yeltsin that became known as the ‘family’. The leading member of the ‘family’ - and the gatekeeper to the President - was Yeltsin’s youngest and much loved daughter, Tatyana. Despite having no knowledge of business or political affairs, she was his most influential adviser, could secure special favours from the state, and became very rich in her own right. The friendship between the two oligarchs and the President’s daughter blossomed. According to Aleksandr Korzhakov, Berezovsky lavished Tatyana with presents of jewellery and cars, notably a Niva (a Russian version of a Jeep). ‘The vehicle was customized to include a special stereo system, air-conditioning and alarm system, and luxury interior. When the Niva broke down, Berezovsky immediately gave her a Chevrolet Blazer [a sports utility vehicle then worth $50,000].’²²

According to Strobe Talbott, ‘Berezovsky’s close ties to Yeltsin’s daughter Tatyana earned him a reputation as a modern-day Rasputin…At the height of Berezovsky’s influence, when his name came up in people’s offices in Moscow - including near the Kremlin - my hosts would sometimes point to the walls and start whispering or even, in a couple of cases, scribble notes to me. This was a practice I had not seen since the Brezhnev era in furtive encounters with dissident intellectuals.’²³

If Berezovsky was the dominant uncle of the ‘family’, Abramovich was the quiet but precocious nephew who had a talent for charming the most important member - Tatyana. One TV executive, Igor Malashenko, was stunned by the young oil trader’s access: ‘I arrived one night at Tanya’s dacha and here was this young guy, unshaven and in jeans, unloading French wine, very good wine, from his car, stocking the fridge, making shashlik. I thought to myself, “They’ve got a new cook”. But when I asked Yumashev [Tanya’s husband], he laughed and said, “Oh no, that’s Roman”. He’s living with us while his dacha is being renovated.’²⁴

In October 1996 Berezovsky was at the height of his power and was made Deputy Secretary of the country’s National Security Council - with responsibility for resolving the Chechnya conflict. (The first Chechen war began in 1994 when Chechnya tried to break away from the Russian Federation. Yeltsin’s government argued forcibly that Chechnya had never been an independent entity within the Soviet Union. The ensuing bitter struggle was disastrous for both sides.) A whirlwind of energy, Berezovsky was a frequent visitor to the cabinet offices of the Kremlin, clutching a worn leather briefcase in one hand and a new huge grey Motorola mobile phone in the other. While he waited to see Yeltsin, his phone would constantly ring. ‘Cannot talk. In Kremlin’, he would respond in his rapid-fire speech. Berezovsky wore officials down with his ceaseless networking and lobbying. When government ATS hotlines were installed in the guesthouse of his office at LogoVaz and his dacha at Alexandrovka, the telephone calls became even more frenzied.

In many ways such crony capitalism had much in common with the worst features of the Soviet era. For a while Berezovsky and his colleagues functioned like a politburo: conducting backroom deals behind the scenes, secretly conspiring with and against each other, just as the senior apparatchiks had done under communism. As one prime minister was replaced with another, Berezovsky would hand the incoming leader pieces of paper bearing the names of the ministers he wanted in the new government. The oligarchs now viewed the world through the prism of their personal interests. ‘It is my fundamental belief that, leaving aside the abstract concept of the interests of the people, government should represent the interests of business,’ he admitted.²⁵

Nevertheless, Yeltsin’s circle was not immune from outside pressure. At one point the independent prosecutor-general, Yuri Skuratov, started an investigation within the Kremlin itself. Yeltsin promptly sacked him, but Skuratov refused to quit and the Russian Federation Council twice refused to ratify his dismissal. Some years later, in 1999, the FSB was tasked with discrediting him. In a classic KGB-style entrapment, ORT broadcast a short, grainy video of ‘a man resembling’ Skuratov apparently romping with two prostitutes. It was never clear if it was Skuratov or not but, nonetheless, that was the end of him.²⁶

By 1998, Russia was bankrupt. Shares nose dived, interest rates had reached 150 per cent, and bankruptcies soared. By August of that year, one analyst noted: ‘Russia’s credit rating is below Indonesia’s. The size of its economy is smaller than Switzerland’s. And its stock market is worth less than the UK water industry.’²⁷

Throughout this turmoil, the genuine political influence of the business elite was forever being exaggerated, not least by themselves. They had become so rich so quickly that they were suffering from what Stalin used to call ‘dizziness with success’. Their influence quickly began to wane after 1997.²⁸ Berezovsky was dismissed from the Security Council, although a few months later he returned as the Executive Secretary of the Confederation of Independent States, which involved coordinating the individual parts of the Russian Federation. None of this either undermined his personal fortune or prevented him from continuing to plot the future of Russia.

The oligarchs and their associates were not the only Russians making a killing out of the transition from communism to capitalism and who later started showering London with money. Among the other winners were the ‘red directors’. The property agent who ran the Russian desk at the London estate agents Savills, remembers an older Russian client, aged about sixty-five, who owned a chemicals factory. One of the ‘red directors’, he was looking to spend several million pounds on a property in London in 2002. Despite his wealth, he was still nostalgic for the communist system that had once served people like him so well. Having been shown around an apartment, he asked, quite out of the blue, where Karl Marx was buried. A short time later he visited Highgate Cemetery. He clearly had much to thank the intellectual father of the Soviet state for.

During the 1990s, Russia was a place where shrewd business operators played fast and loose with the country’s fledgling market economy. With no regulatory infrastructure to ensure a smooth, efficient - and legal - transition, it was a goldmine for clever, aggressive operators.

Nothing illustrates the forces at work more graphically than the case of aluminium. The control for this lucrative mineral became the subject of a seven-year long bitter and deadly struggle that became known as the aluminium wars. It left a trail of bloodshed that gave Siberia its reputation as the ‘Wild East’.

One of those to emerge triumphant in the battle for aluminium was Oleg Deripaska, although his route to wealth differed from that of the other oligarchs. He was a 23-year-old student when the Soviet Union collapsed in 1991, but by 1994 had made big money from trading in metal. Unlike the other oligarchs, Deripaska did not acquire his fortune through the privatization auctions or via political connections. His control of the aluminium industry was largely due to the way in which he outmuscled and outwitted his competitors and his prowess with the hostile takeover. Deripaska was a post-Soviet corporate raider, borrowing from techniques pioneered by American and British tycoons, notably Sir James Goldsmith.

In person, Deripaska, tall with cropped blond hair and deep blue eyes, is deceptive, a man of few words. Negotiations were more like poker or chess than orthodox business deals. He shared many of the characteristics of his friend Roman Abramovich - externally reserved and even more boyish-looking. Despite appearances, however, Deripaska was a serious operator with nerves of steel. The editor of Russia’s Finans business magazine once described him as ‘A very harsh person. Without that quality it would have been impossible to build up so much wealth.’²⁹

Like Abramovich, Deripaska also became a member of the Yeltsin ‘family’ - but more directly. In 2001 he married Polina Yumashev, daughter of Yeltsin’s chief of staff, who was himself married to Yeltsin’s daughter, Tatyana. Deripaska first met Polina at Abramovich’s house. Their wedding was the social event of the year in Russia and they soon had two children. Like Abramovich, Deripaska arranged for one of the children to be born in London and employed a British nanny. It was a smart, some say strategic, marriage because, after Yeltsin left office in 2000, President Putin’s first Presidential Decree granted immunity from criminal prosecution to Yeltsin and all his relatives, a move seen by many as a quid pro quo for his backing.

Oleg Vladimirovich Deripaska was born on 2 January 1968 in Dzerzhinsk, 400 kilometres east of Moscow and at the heart of the Russian chemicals industry (the city was named in honour of the first head of the Soviet secret police). His father died when he was only four and he was brought up by his grandparents on a traditional Cossack family farm in Krasnodar, south-western Russia.

Although Deripaska’s parents were Jewish, he was more conscious of his Cossack heritage. ‘We are Cossacks of the Russian Federation,’ he later said. ‘We are always prepared for war. This is a question of being able to deal with problems and any situation. It is the case that difficulties are not a catastrophe.’³⁰ A serious and studious teenager, he was accepted, despite his humble origins, into Moscow State University to study quantum physics. However, before he started his course, he was called up to serve in the army and was stationed on a barren steppe on the border with China.

Despite his raw intelligence, times were hard for the young student. Following national service, he returned home to find the country on the brink of collapse and he worked on building sites across Russia. There seemed to be little future in quantum physics and so he abandoned his studies. His first job was in 1992 as a director of a company that sold military hardware following the withdrawal of Russian forces from East Germany. He then worked as a metals trader in Moscow, before deciding to concentrate on the aluminium industry.

At the time the industry was dominated by the brothers Mikhail and Lev Cherney. Born in Tashkent, the brothers grew up in Uzbekistan and, through exploiting the opportunities created by the introduction of a free market, had, by the early 1990s, already built up a substantial business manufacturing and exporting coal and metal. By late 1993, the businessmen held majority stakes in Russia’s largest aluminium smelters, but then Mikhail Cherney’s name was tarnished by allegations in the Russian press of controversial business methods, claims that he strongly denied as smears peddled by his business and political enemies. Despite a series of allegations by international law enforcement agencies, Mikhail Cherney has never been convicted of any crime. By 1994, he had settled in Israel and ran his business empire from there.

That year Mikhail Cherney - now calling himself Michael - gave the then 26-year-old Deripaska his first big break, hiring him to run one of his giant smelters - the Sayanogorsky aluminium plant, the largest in the republic of Khakassia. Dedicated and technically brilliant, Deripaska increased production and somehow persuaded the impoverished workforce not to strike. But he was also a neurotic, paranoid manager and trusted no one. He suffered from hypertension and his brain rarely switched off. He hardly slept and, when he did, would wake in the early hours and visit factories and work on some new technology or other. He loved concentrating on the tiny, often petty, technical details of the business and on commercial contracts.

In the endless political and business power struggles of the time, Deripaska soon came into conflict with the local mafia. The Sayanogorsky plant was threatened by raids by armed gangs determined to seize control, and he received constant death threats, on more than one occasion coming within a whisker of being a victim of the bloodshed himself. Sometimes he even slept by his furnaces on the factory floor to protect them from being taken over by mobsters. He survived, and saw off the criminal syndicates at work within the industry.

During this period, Deripaska showed remarkable acumen, some say genius, in wresting control from the gangs of mercenary local officials and brutal competitors. This earned him a certain legitimacy and respect among his peers. By 1999 - in less than five years - he had risen from being one of Cherney’s lowly subordinates to being his business equal. Over the next three years, Deripaska bought out all his remaining rivals, including Cherney himself, to emerge as the sole owner of Rusal, the giant aluminium corporation. In less than a decade, Deripaska, the student of quantum physics and former manager of a smelting works, had risen to control the entire aluminium industry. Even by the standards of 1990s Russia, his was a meteoric rise, but one dogged by bitter division and dispute.

Russia in the 1990s witnessed a transfer of wealth of epic proportions. What happened there could be seen as the equivalent of Margaret Thatcher deciding to sell all Britain’s nationalized industries, from British Gas to British Telecom, for a fraction of their real value to a handful of her favourite tycoons who had donated money to the Conservative Party.

Some of the beneficiaries liked to defend their activities by comparing themselves to the nineteenth-century industrial and financial tycoons such as John D. Rockefeller, J. P. Morgan, and Cornelius Vanderbilt, who built massive fortunes out of oil, finance, and the railroads in the United States in the late nineteenth and early twentieth centuries. Rockefeller, Morgan, and Vanderbilt were dubbed the ‘robber barons’ for their ruthless and exploitative tactics. Khodorkovsky once described his hero, ‘if he had one’, as John D. Rockefeller, the founding father of the American oil industry and the world’s first billionaire. But Rockefeller’s business methods also became so unpopular that towards the end of his life he was known by his staff as the ‘most hated man in America’.

Many of the oligarchs evoked similar reactions among the Russian people. Whatever their business records, the American robber barons devoted their lives to building their giant monopolies in oil, railroads, and steel from scratch. The modern Russian oligarchs have no such defence. Few of them laid the pipelines, built the factories, assembled the rigs, or even took the necessary financial and commercial risks. Few created new wealth. Few of them knew much about the industries that landed in their laps. When Khodorkovsky acquired Yukos and went to visit one of its main sites, his host was astonished to discover that he had never seen an oil field before. The oligarchs acquired their fortunes by manipulating the system with a mixture of bare-knuckle tactics and political patronage. While the robber barons reinvested their money at home, the oligarchs moved much of their acquired wealth out of the country.

Successive studies have confirmed the impact of the scale of personal enrichment on the concentration of economic ownership in Russia. One found that in 2001 Russia’s top-twelve privatized companies had revenues that were the equivalent of the entire federal budget. Of Russia’s sixty-four largest private companies, just eight oligarch groups controlled 85 per cent of their revenues.³¹

There were alternatives. It was Western leaders and financial institutions that rejected a Marshall Plan for Russia, such as the one for a social cushion advocated by George Soros. Jeffrey Sachs, the influential American economist and one of the key architects of the push for the ‘big bang’ approach - the privatization of the economy at speed - later admitted that when he suggested such a plan to the White House, ‘there was absolutely no interest at all. None, and the IMF just stared me down like I was crazy.’³² Instead, the Yeltsin government was pressed to move forward with ‘big bang’ regardless of its economic and human consequences. Those in power at the time argue that all the options for political and economic transition from communism carried high risks. But then the West’s top priority was to create a malleable and compliant country offering cheap oil and no return to its past Soviet system. Other considerations were secondary.

The Western advisers knew that such a long-standing form of government based on corruption and authoritarianism could not be reformed overnight, not least in a country where the ownership of private property had been a crime for the past seventy-five years. But as Professor Michael Hudson, a Wall Street financial economist, observed: ‘Was there really not a middle ground? Did Russia have no choice between “wild capitalism” at one extreme and the old Soviet bureaucracy at the other? Both systems were beginning to look suspiciously similar. Both had their black-market economies and respective dynamics of economic polarization.’³³

Some commentators argue that the emergence of an oligarchic class was inevitable, others that the creation of an economic elite was necessary for a quick transition to capitalism. Yet others claim that in replacing the old corrupt and incompetent command and control system it was even desirable. Berezovsky later defended his own activities as the inevitable result of capitalism. ‘I don’t know any example where property is split in a fair way,’ he said. ‘It doesn’t matter how property is split. Everyone will not be happy.’ But he also admitted making ‘billions’ out of privatization and that Yeltsin ‘gave us the chance to be rich’.³⁴

Inevitable or desirable, the social cost to Russia was immense. The broad consensus is that the privatization process was one of the most flawed economic reforms in modern history. Industrial production declined by some 60 per cent during the 1990s, vast swathes of the economy were wiped out, and much of the population was plunged into poverty. The vast amount of money that poured out of Russia to be hidden away in offshore bank accounts accentuated the dramatic economic crisis of 1998. During the 1990s, what was known as ‘capital flight’ became one of the country’s most debilitating economic problems. According to economists at Florida International University, ‘It erodes the country’s tax base, increases the public deficit, reduces domestic investment and destabilises financial markets.’³⁵

The investment fund Hermitage Capital has estimated that between 1998 and 2004, £56 billion in capital flowed out of Russia, most ending up offshore. Although some of this was legitimate, with investors looking for a safer home than a Russian bank, most was not. Russia’s Economic Development and Trade Ministry says that between $210 and $230 billion left Russia during the reforms, approximately half of which was ‘dirty’ money, linked to money laundering or organized crime. The IMF’s estimate is that $170 billion escaped the country in the seven years leading up to 2001. Other sources suggest that around $300 billion of assets in the West belong to Russian citizens, almost half from ‘uncertain’ sources.³⁶

This was money that could have been used to rebuild factories, start new businesses at home, and invest in infrastructure. In effect, Russia lost the equivalent of one-third of its gross foreign debt in this way. Although there was legislation designed to prevent such capital flight, it was largely ignored. By 2000, privatization had rendered a once mighty country, which spans eleven time zones, rotten to the core, according to the New York Times columnist Thomas Friedman: ‘At every level, different ministries, department heads, agencies and mayoralties have gone into partnership with private businesses, local oligarchs or criminal elements, creating a kind of 21st-century Russian feudalism.’ Friedman quoted the Russian political analyst Sergei Markov: ‘The Russian state looks like a big Charles Atlas, full of muscles. But as you get closer you realize that this Atlas is actually dead. Inside, this huge body is full of worms who are eating the body and feeding off it.’³⁷

As well as the oligarchs and the ‘red directors’, others were moving their money abroad during the 1990s. Though some of them were small players who simply didn’t trust the banks, most were wealthy, criminal, or members of the KBG - renamed the FSB (the Federal Security Service) in 1992. Some of the proceeds of crime were laundered through purchasing buildings, bars, and restaurants in Eastern Europe, but much of it ended up swirling around London’s nightclubs and casinos. Some passed through British banks.³⁸

The money often arrived in the form of hard cash, and stories of recent émigrés turning up with suitcases full of banknotes in the 1990s are legion within the Russian community in London. One small-time British property agent who used to socialize in a nightclub frequented by the Russians told of how he had been introduced to a young woman who happened to be the daughter of a senior FSB official. When she discovered he dealt in property, she asked if she could come and see him the next day. When she arrived at his office, he noticed that the woman was carrying a revolver in her coat pocket. When he asked how she would be paying, she explained that it would be by cash, literally. She opened up a large case stuffed with banknotes. The agent thanked her and politely asked her to take her business elsewhere.

Whether they were buying property, jewellery, or cars, payment was often by cash. Mikhail Ignatief, who arrived in London in 1991 at the age of twenty-one with his English fiancée, set up a successful travel business and used to help and advise Russians on shopping or business trips. He remembered one client asking his help to buy a Range Rover and arranged for one of his team to take him to the nearest showrooms. The client was shown around and said he wanted three cars, all to be shipped back to Russia. He then opened up a large leather bag stuffed with banknotes. A somewhat concerned manager called the police and the matter was only settled when the man was persuaded to go to a bank, deposit the money, and then pay by cheque.

The privatization process of the 1990s that led to London being awash with Russian money had no shortage of critics in and outside of Russia. Chrystia Freeland, the former Moscow bureau chief of the Financial Times, described the events as ‘a cynical manipulation of a weakened state…Yet as I watched them plot and profit, I couldn’t help asking myself how different the Russians really were from our own hero-entrepreneurs…our society so fawningly lauds for producing an era of unprecedented prosperity…The future oligarchs did what any red-blooded businessman would do. The real problem was that the state allowed them to get away with it.’³⁹ In his influential book, Failed Crusade, Stephen F. Cohen, Professor of Russian Studies at New York University, called US policy towards Russia in the 1990s ‘the worst American foreign policy disaster since Vietnam’.⁴⁰

One of the architects of privatization, Vladimir Potanin, later accepted its flawed nature: ‘Although I do not deny I was the author, I would like to point out that the concept was changed to a great extent as a result of political pressure on government from the red directors…The government allowed no access to foreign investors and other measures. This was later criticised and rightly so.’⁴¹ In October 1993 a reflective Khodorkovsky told Frontline, the American news programme: ‘Russian law allowed us to do things that were unthinkable in the Western business world.’

Even at the time advocates of privatization accepted that huge mistakes were made. In 1998 Boris Nemtsov, one of the young reformers who was once seen as a potential successor to Yeltsin, said, ‘The country is built as a freakish, oligarchic capitalist state. Its characteristics are the concentration of property in the hands of a narrow group of financiers, the oligarchs. Many of them operate inefficiently, having a parasitic relationship to the industries they control.’⁴²

By 1999, the oligarchs’ priority was to protect their power and wealth and to ensure a successor to Yeltsin who would be as compliant as he had been. ‘The problem was that a lot of the people who had the potential to lead Russia were themselves up to their necks in relationships with these people,’ observed William Wechsler, a US National Security Council and Treasury official. ‘The fear was that Russia would become like a nuclear-armed Colombia. That prospect was terrifying but to me it was real…Then along comes Putin from the KGB, which was obviously not clean. In the subsequent fight between Putin and the oligarchs, everyone was saying it was a good-guy-bad-guy situation. To me, this was a bad-guy-bad-guy situation.’