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Mark Hollingsworth and Stewart Lansley

‘It’s like the Wild West out there [in Russia]. A few businessmen own everything. It’s amazing’ - STEPHEN CURTIS

‘There are no barriers to a rich man’ - Russian proverb

CHAPTER 1 The Man Who Knew Too Much

‘I have dug myself into a hole and I am in too deep. I am not sure that I can dig myself out’ - STEPHEN CURTIS, January 2004

6.56 P.M., WEDNESDAY, 3 MARCH 2004. A brand-new white six-seater £.5-million Agusta A109E helicopter lands under an overcast sky at Battersea heliport in south-west London. Waiting impatiently on the tarmac and clutching his two unregistered mobile phones is a broad-shouldered 45-year-old British lawyer named Stephen Curtis. He is not in the best of moods. Three minutes earlier he had called Nigel Brown, Managing Director of ISC Global Ltd, which provided security for him, regarding disputed invoices sent to a Russian client. ‘This is causing problems!’ he shouted and then paused. ‘Look, I have to go now. The helicopter is here.’

Curtis climbs aboard the helicopter and maneuvers his bulky frame into the passenger cabin’s left rear seat. A member of the ground staff places his three pieces of hand luggage on the seat in front of him and the pilot is given departure clearance. At 6.59 p.m. the chopper lifts off into the gloomy London sky. It is cold and misty with broken cloud at 3,800 feet, but conditions are reasonable for flying with visibility of 7 kilometers.

The lawyer turns off his mobile phones and sits back. After a day of endless and stressful phone calls from his £4 million luxury penthouse apartment at Waterside Point in nearby Battersea, he is looking forward to a relaxing evening at home at Pennsylvania Castle, his eighteenth- century retreat on the island of Portland off the Dorset coast. By the time the helicopter approaches Bournemouth Airport, after a flight of less than one hour, it is raining lightly and the runway is obscured by cloud. The Agusta is cleared to land and descends via Stoney Cross to the north- east where, despite the gloom, the lights of the cars on the A27 are now visible in the early evening darkness. The pilot, Captain Max Radford, an experienced 34-year-old local man who regularly flies Curtis to and from London, radios air traffic control for permission to land on runway twenty-six. ‘Echo Romeo,’ replies Kirsty Holtan, the air traffic controller. ‘Just check that you are visual with the field.’ ‘Er, negative. Not this time. Echo Romeo.’ The air traffic controller can only see the helicopter on her remote radar monitor. Concerned, she increases the runway lighting to maximum intensity. This has the required effect and a mile from the airport the pilot radios: ‘Just becoming visual this time.’ ‘Golf Echo Romeo. Do you require radar?’ asks Holtan. ‘Yes, yes,’ replies Radford, his voice now strained; he repeats the word no less than eleven times in quick succession. Suddenly, the chopper descends sharply to the left. It then swings around almost out of control. Within seconds it has fallen 400 feet. ‘Golf Echo Romeo. Is everything O.K.?’ asks a concerned Holtan. ‘Negative, negative,’ replies Radford.

They are just 1.5 kilometres east of the threshold of runway twenty-six when the height readout is lost on the radar. For the next fifty-six seconds the pilot confirms that he has power but then suddenly, frantically, radios: ‘We have a problem, we have a problem.’ As the chopper loses power, at 7.41 p.m. Radford shouts down the open mike: ‘O.K., I need a climb, I need a climb.’ Radford hears a low horn, warning that the speed of the main rotor blades has dropped. He keeps his finger on the radio button and can be heard struggling to turn out of a dive, but he has lost control. ‘No. No!’ he shouts in a panic. They are his last words. The helicopter, now in free fall, nose dives into a field at high speed and explodes on impact, sending a fireball 30 feet into the air. The aircraft is engulfed in flames, with the debris of the wreckage strewn across a quarter of a mile. ‘I heard a massive bang and rushed up to the window and just saw this big firewall in front of me,’ recalled Sarah Price, who lives beneath the flight path. ‘The whole field appeared to be on fire. It was horrific.’ Some thirty-five firefighters rush to the scene, but the two men aboard – Stephen Curtis and Max Radford – die instantly. Later that night their charred bodies are taken to the mortuary at Boscombe, Dorset, where an autopsy is performed the following day. Their corpses are so badly burnt that they can only be identified using DNA samples taken by Wing Commander Maidment at the RAF Centre of Aviation Medicine at Henlow in Bedfordshire.

The news of Curtis’s dramatic death was not only deeply traumatic to his wife and daughter, it also sent shock waves through the sinister world of the Russian oligarchs, the Kremlin, and a group of bankers and accountants working in the murky offshore world where billions of pounds are

regularly moved and hidden across multiple continents. That was not all. Alarm bells were also ringing in the offices of Britain’s intelligence and law enforcement agencies, for Stephen Curtis was no ordinary lawyer. Since the 1990s he had been the covert custodian of some of the vast personal fortunes made from the controversial privatization of the country’s giant state enterprises. Two of his billionaire clients – Mikhail Khodorkovsky and Boris Berezovsky – had entrusted Curtis to protect and firewall their wealth from scrutiny by the Russian authorities. The Russians liked and trusted the highly intelligent, gregarious Curtis. Generous, a heavy drinker, loyal, amusing, and extravagant, he slipped naturally into their world. Also impatient, ruthless, and aggressive when required, he restructured their companies, moved their funds between a bewildering series of bank accounts lodged in obscure island tax havens, established complex trusts, and set up an elaborate offshore ownership of their assets. On their arrival in London he found them properties, introduced them to the most powerful bankers, entertained them late into the night, and recommended private schools for their children and even Savile Row tailors for their suits. By early 2004, Curtis had not only introduced his wealthy new Russian clients to many aspects of British life, but he was also the guardian of many of their secrets. He was the only person who could identify and unravel the opaque ownership of their assets – property, yachts, art, cars, jewellery, and private jets as well as their bank accounts, shareholdings, companies, and trusts. ‘Stephen knew everything because he set up their whole infrastructure,’ said a close friend. He salted away billions of pounds in an intricate, sophisticated financial maze, which the Russian government later tried, mostly unsuccessfully, to unravel.

Operating from his office in a narrow, four-story Mayfair house at 94 Park Lane, Curtis found that working for oligarchs was also lucrative. The product of a relatively modest upbringing himself, Curtis amassed a sizeable personal fortune from his new clients, enough to enable him to acquire his own helicopter, a private aircraft, and a penthouse apartment in London, as well as Pennsylvania Castle. He donated substantial sums to charity, entertained his friends at the castle, and hosted expensive holidays in the Caribbean. But Stephen Curtis was a lawyer who knew too much. Although he loved flirting with risk and thrived on the pressure and excitement of working with the Russians, he also became increasingly nervous about his own vulnerability and the safety of his family. At the time of his death he was caught in the middle of an epic power struggle, one of the highest-stakes contests between state and business ascendancy in the world – between the most powerful man in Russia, President Vladimir Putin, and its wealthiest businessman, Mikhail Khodorkovsky. By October 2003, Curtis had been working for Khodorkovsky for six years when his billionaire client was arrested at gunpoint in central Siberia for alleged massive tax evasion and fraud. A month later the Mayfair lawyer found himself further embroiled in the conflict when he was appointed chairman of the Gibraltar-based Menatep, the bank that controlled Yukos, Khodorkovsky’s $15 billion oil company. Russian newspapers suddenly began referring to a ‘mystery man’ in Gibraltar who controlled Russia’s second-biggest oil producer. Billions of pounds were at stake, the political survival of Putin was in the balance, and Curtis was billed to play a pivotal role in the forthcoming court drama. In March 2004 the trial of Khodorkovsky was imminent and the pressure on Curtis was intense. On the morning after his death on 3 March, the offices of two Swiss

companies connected to Yukos were raided by Swiss police at the request of the Russian prosecutors. Documents were seized, suspects were interviewed in Geneva, Zurich, and Freiberg, and Swiss bank accounts containing $5 billion were frozen. Moreover, just a few weeks earlier Curtis had taken another critical and high-risk decision: to cooperate covertly with British police officials. Until only recently a back-room lawyer (secretive, low profile, discreet), he found himself suddenly thrust into the spotlight as chairman of a highly controversial Russian company. Sensitive and highly strung at the best of times, he felt increasingly exposed in this new role. Sooner or later he feared the Russian authorities would come knocking on his door asking questions about his own role in alleged tax avoidance and the filtering of cash out of the country. As he was legally obliged, Curtis had been scrupulous in reporting ‘suspicious transactions’, or the merest hint of criminal activity, to the National Criminal Intelligence Service (NCIS) at Scotland Yard, which investigates money laundering and organized crime. In May 2003, for example, he had filed a suspicious transaction report about one of his Russian clients. Now he needed protection for another reason: he feared that he might become the target of commercial enemies – rival oil companies and minority investors of Yukos who claimed that they were being defrauded. He also knew that contract killings in Russia were commonplace. ‘I have dug myself into a hole and I am in too deep,’ he told a colleague. ‘I am not sure that I can dig myself out.’ In the last few weeks of his life Curtis was under constant surveillance by commercial and Russian state investigators and was considering moving offices. His telephones were tapped and in early 2004 his security consultants discovered a small magnet used to secure a listening device at his country home in Dorset. According to

Eric Jenkins, an uncle who often visited him in Gibraltar, where his nephew lived for most of the year, Curtis received numerous anonymous threats and intimidating phone calls. He took them seriously enough to hire a bodyguard. ‘There certainly were death threats against Stephen,’ confirmed Nigel Brown, whose company also provided security for Curtis’s clients Berezovsky and Khodorkovsky. ‘The timing of his death was very suspicious and there were people out there who had a motive to kill him. He just knew too much.’ At first Curtis dismissed the threats, but when one phone call mentioned his wife and 13-year-old daughter, he decided to act. In mid-February 2004, deeply worried, he approached the Foreign Office and NCIS and offered full but covert cooperation. He would provide information about Russian commercial activities in Britain and the oligarchs’ assets, in return for protection for himself and his family. Up to that point his relationship with NCIS had been a limited, almost standard form of cooperation, a role many solicitors play. For NCIS Curtis was a potentially prized informant with insider knowledge of controversial Russian business activity in London. He was immediately assigned a controller, but after only two meetings the NCIS officer was transferred to another operation. Curtis asked to be assigned another controller but before this was done, he was dead. A week before the fatal crash Curtis had told a close friend at his apartment at Waterside Point, ‘If anything happens to me in the next few weeks, it will not be an accident.’ He had laughed nervously but he was not joking. He had played the messages left on his mobile phone to colleagues at his law firm. ‘Curtis, where are you?’ asked a voice with a Russian accent. ‘We are here. We are behind you. We follow you.’ At the inquest his uncle, Eric Jenkins, testified that his nephew had repeated the same words of warning to him.

The frequent threats convinced some of Curtis’s colleagues and relations that he was murdered. ‘Definitely’, one former employee of his law firm claimed. ‘It was done by remote control. They knew about his flight plans in advance because they were tapping his phones.’ Dennis Radford, the father of the pilot, told the subsequent inquest that he did not think that the Air Accidents Investigation Branch (AAIB) had properly investigated the possibility of foul play. ‘The lack of security at Bournemouth Airport is such that, had anybody wished to sabotage the aircraft, they would have unchallenged and unrestricted access for that purpose,’ he said. Witnesses say that they heard an unexplained and incredibly loud bang just before the crash. ‘I heard a kind of thump noise and the dog started barking, so I came outside and I heard another couple of bangs. It made a particularly harsh noise, as if the engine was malfunctioning,’ Jack Malt, who lives near the crash site, testified at the inquest. ‘There was a period of silence in the moments before the explosion so I guess the engines must have cut out,’ said Sarah Price, who lives 300 yards from the site of the crash. She also heard a massive bang just before the explosion. And Gavin Foxwell, another local resident, told the inquest that the helicopter made ‘a stuttering, unusual sound, as if it was struggling to stay aloft’. The death of Stephen Curtis remains a mystery to this day. However, no credible evidence of sabotage or murder has ever been discovered. The investigation by the AAIB concluded: The possibilities of unauthorised interference were considered. An improvised explosive device could have been positioned in the cabin or the baggage hold. All cabin doors at the undamaged skin of the baggage door were, however, recovered from the accident site. No

evidence of damage other than consistent with ground impact was found on any of them. In particular no high velocity particle impacts were noted in any of these door components. At the inquest Paul Hannant, the Senior Inspector of the AAIB, said, ‘If you are going to bring an aircraft like this down, you have either got to destroy the main rotor system or interfere with the main gearbox. The only other real way is to interfere with the controls. If you disconnect the controls, that would be immediately apparent to the pilot… Any attempt to use a corrosive device or a remote control device would also have been apparent to Captain Radford.’ Ultimately, deteriorating weather conditions and pilot inexperience were blamed for the crash. According to the AAIB inspector, ‘The most likely cause of the accident was that Captain Radford became disorientated during the final stages of the approach to Bournemouth Airport.’ Yet, while the weather on the fateful night of 3 March 2004 was poor – light drizzle, broken cloud, and overcast sky – flying conditions were not especially hazardous. As his father Dennis later claimed, ‘Max had flown many, many times in considerably worse conditions than that. And if he became disorientated, why was he on the radio describing the runway and talking to the control tower twenty-nine seconds before the crash?’ At the inquest assessments of Radford’s experience and competence were mixed. He had been a pilot since 1993, had recorded 3,500 flying hours, and had been flying Curtis regularly. During his operational training for flying the new, upgraded Agusta A109E, Radford consulted two flight instructors. ‘I felt his confidence exceeded his competence,’ testified Alan Davis, but Richard Poppy concluded that Radford was ‘competent’ to fly the Agusta A109E. While the AAIB found that he had not used instrument flying since 2000, they accepted that he was very familiar with

the route and had ‘already achieved seventy-eight hours’ over the previous two months. The inquest jury at Bournemouth Town Hall took just over one hour to reach a verdict of ‘accidental death’. Despite the verdict, however, some close relations remain sceptical to this day. They point out that Radford was a responsible, cautious pilot who had refused to fly Curtis in the past when the weather was poor, notably for a New Year’s Eve party at Pennsylvania Castle. Curtis’s former security advisers remain suspicious, too. Nigel Brown is adamant that it was an assassination and is highly critical of the police. ‘What I cannot understand is why there has never been a proper murder investigation’, he has said. ‘There was a just cause of suspicion because Stephen had received death threats, there was a motive because of what he knew, and there were suspicious circumstances. But the police did not interview me or my colleagues or Stephen’s clients or his employees. Usually, the police would interview the last person to speak to him and I was that person. We may not know for sure what happened to Stephen but I think there could have been a more thorough inquiry.’ While Curtis’s wife Sarah has never believed that her husband was murdered, she has reflected on why it was a Russian businessman who first informed her about the death of her husband. ‘I am sorry that Stephen is dead,’ he told her. The police did not telephone until an hour later to say that ‘there has been an accident’. It is a measure of the accuracy of the premonitions Curtis had about a premature death that he left detailed instructions for his funeral. This was partly influenced by his superstitious, almost fatalistic nature. He believed in ghosts and in the afterlife and always thought that he would die young. ‘I will never make old bones’, he once said, well before he met the Russians.

But Curtis had also been diagnosed with leukemia and a rare blood disease. This manifested itself in bizarre ways. During a sailing trip he once hit his head heavily on the boom of the boat and a friend was stunned to see his bloody flesh wound apparently heal before his very eyes. Curtis needed regular blood transfusions to stabilize him and took Warfarin to thin his blood and prevent clotting. He also wore surgical stockings to inhibit deep-vein thrombosis. After two operations at a private clinic, he was told that he could no longer travel by airplane because this would worsen his condition. But he could fly by helicopter, which was why, just three months before his death, he upgraded to the Agusta A109E. Typical of his flamboyant and irreverent personality, he requested that his funeral should not be a mournful event but a ‘celebration of his life’ and that mourners were ‘not obliged to wear traditional black’. On Wednesday, 7 April 2004 some 350 relations, friends, and business associates gathered inside All Saints Church in Easton on the Isle of Portland near the Curtis family home at Pennsylvania Castle. Such was the lawyer’s popularity that a further 100 stood outside and loudspeakers were installed to broadcast the proceedings. At 1.50 p.m. a glass carriage bearing Curtis’s coffin arrived, drawn by two blackplumed horses and adorned with flowers that spelt the word ‘Daddy’. The carriage was followed by a Rolls-Royce Phantom, carrying his widow Sarah and his daughter Louise, and two Bentleys and a Ferrari, ferrying other relations and close friends. Preceded by a Scottish piper who played the ‘Skye Boat Song’, the coffin was carried by six bearers into the church, followed by a tearful Sarah and Louise, both wearing pink coats and dresses. As they slowly walked down the aisle, Sarah noticed the intense, brooding figure of Boris Berezovsky, dressed in black, in the congregation with his girlfriend, two bodyguards, and a Russian entourage. Most of Curtis’s clients attended. Notable absentees were

representatives of his clients IKEA, which did not want to be associated with his controversial Russian clients, as well as most Yukos executives. Indeed, the only Yukos executive to attend was Vasily Alexanyan, a close friend of Curtis and the oil company’s former legal director. Alexanyan was furious that his colleagues had boycotted the funeral despite the risky operations Curtis had conducted for their company. At 2.00 p.m. the service began with traditional hymns, followed by a piano solo by Louise. It was evident that Curtis was well loved. One speaker described him as epitomizing a line from Rudyard Kipling’s poem If, which reads: ‘If you can talk with crowds and keep your virtue/or walk with kings – nor lose the common touch’. His closest friend, Rod Davidson, told the congregation, ‘In business he was in a league of his own. He would start off with an earthquake, build it up to a crescendo and [was] always setting his sights beyond the stars… He was the most generous of men and I think of him now at the pearly gates giving St Peter a red Ferrari and providing Playstations for the cherubs.’ But there was also palpable tension in the air because of the conspicuous and, to some, menacing presence of the Russian contingent, who attracted frequent nervous glances. When Berezovsky and his colleagues left their seats at the end of the service, the remainder of the congregation moved out of the way to let them pass first. The local mourners and Sarah’s friends were mostly conventional, middle-class English people who lived quiet, rural lives in the pristine Dorset village of Easton. They were hardly used to the hard Russian faces or the battery of television cameras, photographers, and police that greeted them as they left the church that bright spring afternoon. To the local villagers it must have looked like the cast of The Godfather or The Sopranos had arrived.

Sarah was devastated by her husband’s death, but she was also confused by and concerned about the media attention. ‘Why are there so many cameras here?’ she asked outside the church. ‘I don’t understand.’ A former secretary, Sarah’s life was family, music, friends, the castle, and the English countryside. Stephen had told her nothing about his secret life in London, Gibraltar, and Russia. A lover of James Bond films, Curtis revelled in this covert existence. He compartmentalized his life, mainly to protect Sarah. ‘I don’t want to know,’ she once remarked and would have recoiled from the dark, cut-throat world of the Russian super-rich. Sarah recognized none of the Russian mourners.‘Who’s this? Who’s that?’ she asked one of Stephen’s colleagues in a state of increasing bewilderment. ‘What on earth was my husband doing with those Russians?’ she asked another friend. Not wanting to worry her, they declined to answer. After the service the procession escorting Curtis’s body was accompanied by the song ‘You’ll Never Walk Alone’, with Sarah’s soprano voice ringing out the final words as she followed her husband’s coffin. The burial took place in the gardens of Pennsylvania Castle, attended only by family and close friends. Curtis was laid to rest to the strains of the bagpipe melody ‘Highland Cathedral’. As the guests mingled in the marquee after the burial the atmosphere was tense and apprehensive. Many former clients were anxious to know the identities of the other guests and whom they worked for. ‘It was a weird situation for a wake,’ said a former employee of Curtis’s law firm. ‘People were looking over their shoulders to see who was talking to who. The strange thing was that I knew some of our clients knew each other, but they would not acknowledge each other at the funeral in case they were photographed or associated with other clients. It was very bizarre, almost comical.’ At 9.45 p.m. a spectacular fireworks display erupted over the English Channel.

The funeral of Stephen Langford Curtis brought together an uneasy, unsettling gathering of two cultures: the conventional, light-hearted, understated English middle class and the dark, intense, stern-faced, focused Russian business elite. Little more than a decade earlier the Russian presence in Britain had been barely noticeable. It would have been rare to hear a Russian accent in a Knightsbridge boutique, a Mayfair restaurant, or even on the London underground, let alone at the funeral of a mysterious, even obscure, British lawyer. There was no sign then of what was to come: the arrival in Britain of a wave of middle-class, affluent Russians. The influx that followed the collapse of communism in 1991 started slowly but by the end of that decade the Russian desire to move to London had reached what one insider has described as ‘fever pitch’.

Although there are no official figures for the size of the London-based Russian and former-Soviet community, it is widely accepted that by 2008 it numbered well in excess of 300,000. This was large enough to spawn four Russian-language newspapers, the glossy magazine New Style, a plethora of Russian networking clubs and internet sites, and a host of Russian social events.

Although by then the Russian community was diverse, most of its members were ordinary professionals who had chosen to live, work, and settle in London. Many had British husbands or wives. It is this group, rather than the oligarchs, who jokingly referred to London as ‘Moscow-on- Thames’. Some worked for international organizations or Russian companies based in London while others had set up their own businesses. Some found jobs as estate agents, in the City, and in retail to target or cater for Russian clients. They mostly came to Britain to escape the crime, political uncertainty, and economic turbulence and were a very select middle-class group compared with the wider Russian population.

Some still commuted back and forth from Moscow, by commercial rather than by private jet. Flight SU247 from Moscow touched down at Heathrow on Friday evenings, carrying what its Aeroflot crew called ‘voskresnuy muzh’, which translates as ‘Sunday husbands’. These were transcontinental commuters, a mix of oil executives, bankers, and importers and exporters who had homes and families in London but who worked in Moscow. For them it was a weekly ritual: Friday and Sunday nights on a four- hour flight, weekends in London, and the week in their Moscow office. Dominating this steady stream of migrants was a tiny but much more high-profile group – the oligarchs, a tiny cadre of privileged insiders who had acquired Russia’s state-owned natural resources and, by the end of the 1990s, had come from nowhere to join the ranks of the world’s super-rich. While some of Russia’s nouveaux riches – billionaires and multi-million-aires – have remained in Russia, most have moved or built a base abroad, shifting their mountain of assets with them. While a few have selected Israel, New York, or Switzerland, most have chosen London. From the millennium, this group scattered its new-found wealth like confetti, helping to transform London into the world’s leading playground of the super- rich, contributing to runaway property prices, soaring profits for luxury goods retailers, and bringing displays of opulence not seen since the 1920s.

Some of the Russian ultra-rich were, through fear of arrest, driven out of Russia and took up residence in London. Others became international super-nomads, living partly in London, partly in Russia, while travelling the globe in their private jets and luxury yachts. Many kept a discreet foot in both camps. Along with the next tier of the Russian rich, the oligarchs were lured by London’s accommodating tax laws, compliant banking system, relaxed lifestyle, unobtrusive City regulations, elite schools, and independent judicial system.

For Roman Abramovich, reserved owner of Chelsea Football Club whose multi-billion-pound oil fortune came from outmanoeuvring his former friend and now bitter enemy Boris Berezovsky; London has helped to satisfy his apparently insatiable appetite for conspicuous consumption.

For Oleg Deripaska, the ruthless young pretender and aluminium magnate who rose to become the richest of all of them, helped along by his cosy relationship with Vladimir Putin; banned from entering the United States, the capital has been a crucial base for building his diverse and colossal global business empire. Before his incarceration, Khodorkovsky used London to woo the British political and business establishment in his international campaign to transform his tarnished global reputation. For Berezovsky, who has been fighting extradition since 2001, London has provided a refuge from Russian prosecutors who have accused him of alleged tax evasion and fraud, charges that he has strenuously denied.

In contrast to the corrupt, politicized judiciary in Russia, London has also offered legal sanctuary and a fair due process of law. While indicted Russian businessmen have been arrested and detained in Spain, France, Italy, and the United States, Britain has refused to accept any of the dozens of extradition attempts by the Russian authorities, souring diplomatic relations in the process. ‘I think they [Russians] feel that this is a country of law,’ said Berezovsky. ‘They feel that they are well protected here.’[1]

London has long attracted the extravagantly rich, but the post-millennium wave of foreign wealth was unprecedented. In the decade up to 2008, trillions of pounds of foreign capital settled in the UK. For those who make money out of money, it was a golden decade for tax lawyers, accountants, and bankers. ‘The British have found a new vocation,’ said William Cash, the well-connected publisher who founded Spear’s Wealth Management Survey, the glossy quarterly that chronicles the activities of the super-rich. ‘That is being the financial bag-carriers of the world. Britain’s ruling classes used to own the wealth. Now they’ve become the fee-earning servants, servicing the global financial elite.’[2]

By 2007, before the devastating impact of the global economic meltdown of the following year, London had displaced New York as the financial capital of the world. It did so by providing an unrivalled tax avoidance industry and a much lighter regulatory touch. After 9/11 and a series of highprofile financial scandals on Wall Street, the US Government passed a new law – the Sarbanes-Oxley Act – which imposed much tougher corporate requirements on the disclosure of information, accountancy procedures, and the process of listing on the New York Stock Exchange. This made New York less attractive to the world’s business rich and London seized its chance. The United States also introduced much tighter visa restrictions for foreign businessmen, which did not compare favourably with the more open UK border controls.

For moneyed Russians London also provides logistical advantages: the flight from Moscow is just four hours, while south-east England enjoys a ring of airports with facilities for private jets. According to James Harding, editor of The Times, ‘From London it is possible to work a normal day and talk to Tokyo in the morning and Los Angeles in the afternoon. A businessman can get on a plane from Moscow and be in central London in five hours, from Bombay in seven, even from Beijing in nine. This is one of the reasons why over the past twenty-five years London has turned itself into an international marketplace while New York has remained essentially a domestic financial capital.’[3]

However, tax remains the primary factor. ‘New York is obviously very stable, but most of the other big centres of wealth management would have questions over them’, said David Harvey of the Society of Trust and Estate Practitioners whose members unashamedly help wealthy families pay as little tax as is legally possible.‘Tokyo’s gone through a period of depression, Singapore is relatively new, and Germany was until recently a tax-heavy jurisdiction. If you’re looking to avoid tax legally, you’re as well going to London as anywhere else.’[4]

The UK boasts an unrivalled tax-avoidance industry – and an abundance of highly paid accountants able to devise complex ways of hiding an individual’s wealth. In 2007 the International Monetary Fund ranked London alongside Switzerland, Bermuda, and the Cayman Islands as ‘an offshore financial centre’.

Most countries have required their residents – including wealthy foreigners – to pay domestic taxes on their worldwide income and capital gains. In the UK foreigners can claim they are ‘domiciled’ abroad even though they may have lived in Britain for years and have British passports. Under this rule, ‘non-domiciles’ would only pay tax on their UK income and not on overseas income, usually the bulk of their earnings. Furthermore, by purchasing property through offshore trusts, foreign buyers could avoid both capital gains tax when they sell and most of the stamp duty usually paid at the initial purchase.

For a Russian billionaire living in London, his earnings from his homeland have been tax-free in the UK.‘There is one reason above all why these people are coming to London and that is the tax law,’ said Natasha Chouvaeva, a London-based Russian journalist. Although this advantage was partially reduced in 2008 when, following a mounting media and public outcry, the government introduced a £30,000 annual levy on non-domi-ciled residents, it was an inconsequential sum for the superrich.

The origins of the oligarchical influx lie in the privatization of Russia’s vast and valuable state assets in the 1990s, an explosive process that enriched the few, opened up a huge gulf between rich and poor, and enraged the Russian people. A World Bank report in 2004 showed that, in effect, thirty individuals controlled 40 per cent of the $225 billion output of the Russian economy in its most important sectors, notably in natural resources and automotives. The study concluded: ‘Ownership concentration in modern Russia is much higher than in any country in continental Europe and higher than any country for which data is available.’[5]

Little of this unprecedented accumulation of wealth has been invested in Russia in business or charity. Rather, most of the money has been secreted abroad, with billions of dollars hidden in a labyrinth of offshore bank accounts in an array of tax havens, from Switzerland and Jersey to the

British Virgin Islands and Gibraltar. Much has ended up being deposited in and managed by British banks. Stashed away, it has been almost impossible to trace. Despite attempts by Russian and British law enforcement agencies, little of it has been recovered and requisitioned back to Russia. Russia is where the money originated, but it has not been a comfortable place to spend it – too many people pointing fingers in Moscow restaurants, too much scrutiny by the tax police, and the constant fear of assassination. The Russian rich cannot go anywhere without bodyguards and bullet- and bomb-proof cars. Even wearing bespoke suits attracts attention. But in the UK or Europe they have been able to go mostly unrecognized and can relax, spending their gains without fear of censure or of being called to account. After buying their multi-million pound town houses and country estates, they have indulged their sybaritic lifestyles, cruising in St Barts, skiing in Gstaad, and shopping in Knightsbridge.

For their wives it has been heaven. ‘London is a metropolis,’ said Olga Sirenko, who edits a website for Russian expatriates. ‘It is fashionable. It has all the boutiques and the culture. Moscow doesn’t have that kind of chic.’ Aliona Muchinskaya, who has lived in Britain since 1991 and runs her own PR company, says that Russians now dismiss Paris as being ‘too dowdy and villagey’. London, by contrast, is ‘bustling and busy with its restaurants and nightclubs. Russians can hire Rolls-Royces and private jets more easily here.’

On arrival in London the first port of call for the affluent, socially aspiring Russian was to the estate agent, notably Savills, Knight Frank, or Aylesford. Deals were cut at high speed: no mortgages, just cash. In 2006 one-fifth of all houses sold for over £8 million went to Russians. For properties over £12 million, the figure was higher still. But Russians have been extremely selective in location, not merely restricting themselves to the golden postcodes – SW1, SW3, W1, and W8 – but only to certain streets and squares within them. Owning a British country property is also prestigious. Again, their choice of location has been very specific: St George’s Hill and Weybridge and Wentworth Park, both in Surrey.

The next decision for the oligarch seeking to emulate the British aristocracy was which top boarding school to send their offspring to, for a British education is another motivating factor for moving to the UK. Public schools generally offer high academic standards and a secure, friendly environment. In Moscow, by contrast, kidnapping is a constant and real fear. While London’s elite estate agents set up offices in Moscow and St Petersburg to woo ultra-rich buyers, British public schools, colleges, and universities have also sent their senior teaching staff to Russia on recruitment drives. By 2008, it was no longer surprising to find Russian students at British schools and top universities, whether it was Abramovich’s teenage daughter at an independent all- girls’ school in London or foreign minister Sergei Lavrov’s daughter at the London School of Economics. School numbers soared from 2000 and some Russian parents started to seek schools where there were no other Russians. The fees – up to £30,000 a year – may not have been a problem, but old habits died hard. A headmistress of one top girls’ public school told the story of a Russian whose daughter had failed the entrance exam and who offered her a suitcase full of cash. He promised to pay for anything – a new gym, classrooms, a swimming pool. ‘Things don’t work like that over here,’ said the bemused headmistress. At another top school a parent asked permission to land his helicopter on the cricket field when visiting his child.

While most Russian children eventually return home, an English education is regarded as a commercial benefit. ‘I know that some oligarchs only hire students with a Western education,’ said Boris Yarishevsky, president of the Russian Society at the London School of Economics.[6] This also extends to politicians. ‘I know people whose fathers occupy really high positions in the Russian government and I know they study in London,’ he added. ‘I don’t think that they would want me to give out their names, though.’[7] It is quite possible that one day Russia – like many African and Middle Eastern states – will elect a President who has been educated at a British private school.

The UK has long been a haven for Russian exiles and dissidents. Anti-tsarist radicals flocked to London in the early twentieth century and Revolutionary Congresses were held here every two years. At the 1907 Social Democratic Congress the New York Times reported that an arrest warrant had been issued for one notable attendant, Vladimir Ilyich Lenin: ‘A Famous Rebel in London. Lenin Will Be Arrested if he Returns to Russia – Real Name Ulianoff ’ ran its headline. Lenin was not a permanent exile but visited the city six times between 1902 and 1911. At Seven Sisters Church in Holloway, north London, he met workers whom he described as ‘bursting with socialism’, while the area around Whitechapel and other parts of the East End swarmed with radicals. During one of his trips Lenin saw Hamlet at the Old Vic and visited Speaker’s Corner and the National Gallery. It was at the British Museum in 1902 that he first met Leon Trotsky, who had just escaped from Siberia.

After the 1917 Revolution, relatively few affluent Russians fled to London – only 15,000 by 1919. Far more moved to the Slavic states, to Berlin, and to a lesser extent to France and China, particularly Shanghai. Those who did arrive in Britain were a mix of aristocrats and middle-class liberal intellectuals, notably the family of the philosopher Isaiah Berlin who arrived in 1919 and settled in the Surrey town of Surbiton. ‘I am an Anglophile, I love England,’ Berlin once reflected. ‘I have been very well treated in this country, but I remain a Russian Jew.’[8] Other descendants of this first wave of Russian immigration include the actress Dame Helen Mirren (born Ileyna Vasilievna Mironov), winner of an Oscar for The Queen, and the Liberal Democrat leader Nick Clegg.

During the Cold War there was always a sprinkling of new Russians coming to London. Some were dissidents fleeing the gulags; others were high-level KGB defectors who ended up rubbing shoulders in London with White Russians – mostly the offspring of those who had fled Russia after 1917. The latter lived mostly quiet lives, spoke good English, and were largely Anglicized. The 1991 Census recorded 27,011 residents living in the UK while claiming the former Soviet Union as their place of birth. Most of them would have been Russian.

The collapse of the Eastern Bloc in the late 1980s had a dramatic impact on the pace of Russian arrivals, unleashing a new and unprecedented wave of migration from Russia and former Soviet and East European states. In 1991 the British Embassy in Moscow issued barely 100 visas – to a mixture of those working for Russian companies, students, and Russians who had married Britons – while only one Russian living in the UK was granted citizenship. Even by the mid-1990s, Londoners would have started to become aware of the occasional unrecognizable foreign accent in a shop or in the street – those Russians who did come congregated in a few favourite restaurants and nightclubs – but otherwise the early arrivals remained largely anonymous. Gradually that trickle turned into a flood. By 2006, the number of Russian visas issued had soared to 250,000, while the number granted citizenship in that same year had risen to 1,830. Berezovsky has likened the twenty- first-century Russian wave to the influx of nineteenth- century Russians to Paris. ‘It used to be that Russian aristocrats spoke French and went to France,’ he said. ‘The modern Russian speaks English and feels more comfortable in England.’[9]

The early Russian migrants – mostly professional middle class but by no means wealthy – were joined within two or three years by a quite different stratum of Russian society. These were what their countrymen dubbed ‘the new Russians’, and they started to arrive between 1993 and 1994. This is the group that was beginning to make money, though not on the same subsequent scale, out of Boris Yeltsin’s economic reforms, the easing of restrictions on private enterprise, and the first wave of privatization. They were a mix of state bureaucrats, entrepreneurial hustlers, Kremlin insiders, and former KGB officials; others were members of emerging Russian-based criminal gangs.

This group of ‘new Russians’, who were always outnumbered by ‘ordinary’ Russian migrants, were by and large not coming to London to settle down. They came on short-term tourist or business visas, to attend a conference or a business meeting, or on shopping and spending trips. As one Russian already living here who knew some of them put it, ‘At this time there was no real dream to come and settle in London. It was difficult to get a permanent visa except illegally, work permits were scarce, and most of this group could make much more money in Moscow than in London. They had money and came here for a week or two at a time to burn it.’

During the 1990s, Britain gradually eased its entry regulations. Tourist and business visas became easier to acquire. Especially welcomed by the authorities were those with money. Anxious to encourage investment from abroad, the government bent the rules to encourage the arrival of the super-rich. ‘Essentially, if you are coming to the country with money to spend, you’re very much welcomed with open arms,’ said John Tincey, Vice-Chairman of the Immigration Service Union, in 2007.[10]

In 1996 the Conservative government of John Major introduced a new ‘investor visa’ for those wanting to make the UK their main home and able to invest at least £1 million in the country. Of this at least £750,000 had to be invested in either government bonds or UK-registered companies. Those investing in this way were, after five years, allowed to apply for permanent residency and eventually UK citizenship. Only one other country in the world – the United States – operated such a scheme (though with a much lower entry fee) and a number of wealthy Russians took advantage of the rule. All they needed to do was meet the investment cash criterion.

The process of seduction worked. The Russians, along with the super-rich of other nations, poured into Britain. As Forbes magazine described it in 2006: ‘London attracts the elite of the world’s rich and successful. It can lay claim unchallenged to one title: it is the magnet for the world’s billionaires.’[11]

Once here, the newly enriched Russians were not shy about spending their way through the capital. They quickly became addicted to high living the British way. In London, history, culture, and the attractions of consumer spending often come together in classic British brands that seem to have a special appeal. The more traditional, the more alluring: shopping at Fortnum & Mason and Burberry, buying a £900 bottle of port at the St James’s wine merchant Berry Bros & Rudd, tea at Claridge’s, and dinner at Rules. The Russians also took to two other British institutions, London’s leading auctioneers Sotheby’s and Christie’s. Here, at the height of the art boom of the mid- noughties, they could be found outbidding other collectors and leading international dealers for the works of French Impressionists and contemporary British artists.

But the staggering spending of Russians is not based just on a crude materialistic desire for luxury goods; it also stems from a fatalistic mindset and generally pessimistic approach to life. For centuries the Russian people have suffered enormous hardship, poverty, starvation, and brutal repression: an estimated 20 million died during Stalin’s regime, and another 1.1 million perished during the siege of Stalingrad alone during 1942-3. Even after the collapse of the Soviet empire, millions continued to live in a state of permanent insecurity and anxiety exacerbated by a harsh winter climate, economic instability, and a corrupt rule of law. Even the new billionaires and their families believe that they could lose everything tomorrow. A favourite Russian saying goes: ‘Never say never to poverty or prison. Both could happen tomorrow.’ This is why they spend. And they also believe in another Russian adage: ‘That which does not grow and expand will expire and will then die.’ For the Russian male the addiction to spending has manifested itself in the acquisition of yachts, jets, and cars. ‘We have a positive attitude towards the English car culture,’ said Alexander Pikulenko, motoring correspondent for the Moscow radio station Ekho Moskvy.[12] In 2007 an estimated 40 per cent of Mercedes-Benz sold at their central London showroom went to Russians. The Russians also brought the good times to the UK’s fledgling private aviation industry and helped turn scores of Britain’s own home-grown entrepreneurs, such as the young property tycoons Candy and Candy, into multi-millionaires almost overnight.

For Russian women London’s luxury shops became the magnet for this ‘rouble revolution’, with Harrods the favourite. Many Russian wives – and probably their daughters as well – would no doubt love their husbands to buy it. There is a joke that Russian émigrés like to tell. On his deathbed a wealthy Russian summons his wife to his side. ‘Olga, when I die, will you promise that you will do something for me? Promise that you will bury me in Harrods.’ Shocked, his tearful wife begs him to reconsider, telling him that he is rich enough to build his own mausoleum in Moscow. ‘No, no, no,’ he interrupts. ‘Don’t you see, if I am buried in Harrods, at least I know you will visit me at least once a week.’ A close second to Harrods is Harvey Nichols, just up the road, where, at the height of the London boom, they employed six Russian-speaking assistants on its five shop floors.

For specialized jewellery the oligarchs’ wives and mistresses would move closer to the West End. Almost every shop in Old Bond Street started to employ a Russian speaker, while top jewellers like Asprey and Theo Fennell attributed their increase in profits from the late 1990s to their expanding Russian client base and their taste for expensive one-off designer pieces. Russian wives would think nothing of buying a £5,000 alligatorskin bag and a £90,000 diamond ring. ‘They are like children in a sweet shop,’ observed one employee.

After a morning being chauffeured around their favourite fashion stores, the wives and daughters would retreat for lunch to Roka in Charlotte Street, the Russian- style tearoom and restaurant, Troika, in Primrose Hill, or Harvey Nichols’ Fifth Floor Restaurant. Their husbands preferred the bars at the Dorchester and Lanesborough hotels for early evening drinks. Then it was dinner at the most expensive, exclusive restaurants, notably Le Gavroche and Cipriani in Mayfair. Even being halfway across the world was not a problem. Late one afternoon Roman Abramovich was in Baku in Azerbaijan and told his aide that he wanted sushi for dinner. The aide ordered £1,200 worth of sushi from Ubon in Canary Wharf, the sister restaurant of Nobu, the fashionable Japanese Park Lane restaurant. It was then collected by limousine, driven to Luton Airport, and flown 3,000 miles by private jet to Abramovich in Azerbaijan.[13] At an estimated total cost of £40,000, it must rank as the most expensive takeaway in history.

Behind the glitz, the glamour, and the wealth lies another side of the Russian invasion. Their arrival may have transformed London financially, but it has also turned Britain’s capital into a murky outpost of Moscow. While the tycoons have been applauded by the City, luxury goods manufacturers, and property magnates, they hardly represent a harmonious community. Behind the mass spending sprees lies a much more sinister world of bitter personal feuds. Many of the Russians are at war with each other as well as with the Russian state. As a result, former friends and business partners have become sworn public enemies.

At issue is the ownership of billions of pounds’ worth of assets.‘They are ruthless,’ said one who has had regular business dealings with the wealthiest Russians. ‘Their word means nothing. They will shaft you if they are given half a chance. It is the law of the jungle. Many of them owe huge sums of money to others.’

Their presence, then, has also introduced to Britain some of the uglier elements of the Russian state. ‘As soon as the oligarchs arrived, so the politics followed them. That is why they all take such elaborate and expensive security precautions,’ another businessman explained. The cut-throat political and business battles being fought for control of the nation’s vast oil, gas, and mineral resources were once confined to Russia itself. Gradually, however, those bitter corporate and personal wars spilt over into Britain. For a while they went unnoticed, at least by the press and the public, if not by the security services. It was only in December 2006, after the former Russian state security officer turned dissident, Alexander Litvinenko, died a long, painful, and public death in a London hospital as a result of polonium-210 poisoning that the implications of Britain’s wooing of Russian billionaires and dissidents became fully apparent. The British government wanted their money but only if they kept their acrimonious internal battles at the border. Litvinenko’s murder exposed the frailty of this strategy of benign tolerance.

As one Russian who personally knows several oligarchs put it, ‘The UK government may not care how these guys made their money or what they get up to as long as they don’t bring their dubious activities into Britain. But we can’t have it both ways. We can’t let them in and expect the seedy elements to stop short of the English Channel.’

Professor Robert Service of St Antony’s College, Oxford, Britian agrees: ‘The British government has collaborated with the City of London in offering a haven for businessmen from Russia who need to expatriate their money. More circumspect, New York and Stuttgart have failed to compete in pursuit of Russian capital. Britain asks few questions about the provenance of new Russian wealth. Hence the hitmen who keep on arriving on our shores to settle accounts by violent means.’[14]

CHAPTER 2 The Russian Billionaires’ Club

‘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. 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.’

CHAPTER 3 Putin summoned twenty-one oligarchs to the Kremlin

... IN 1722, IN ORDER to transform the country from a disparate medieval society into a centralized autocratic state, Peter the Great set about purging the corruption that was endemic in Russian society. This included the elimination of everyone who took bribes. One of those targeted was Aleksandr Menshikov, his most successful general and the most powerful man after the Tsar himself. Menshikov was horrified. ‘If you do, Your Majesty, you risk not having a single subject left’, he told his monarch.[2]

When Vladimir Putin became President in 2000, he had less latitude than Peter the Great, who simply executed his more recalcitrant subjects. Even modern Russia’s arbitrary judicial system would not sanction summary executions of avaricious businessmen. Putin, who knew his history, would therefore have to come up with a different strategy to deal with a group he viewed as a major obstacle to his ambitions for the reshaping of Russia.

While there were whispers of a clampdown, the oligarchs believed they would retain their power and luxurious lifestyles and remain a protected species. After all, theirs was a cabal of the business elite who had engineered the new President’s ascendancy. Just as the oligarchs had connived and conspired to re-elect Yeltsin in 1996, so a group of them manipulated Putin into the Kremlin. In return for their backing, they expected Putin to be as malleable as his predecessor, allowing them to continue to exert influence, accumulate wealth, and be immune from prosecution. They badly misjudged him.

While Putin was Acting President and Prime Minister in 1999, there were signs of trouble to come, when the Prosecutor-General reviewed the way in which Vladimir Potanin, one of the architects of privatization, had acquired Norilsk Nickel, the giant state-owned mining group. ‘They were certainly feeling uncomfortable,’ said one government official. And with good reason. Within two months of becoming President, on the baking hot day of 28 July 2000, Putin summoned twenty-one oligarchs to the Kremlin. ‘It was more like a gathering ordered by Don Corleone than a meeting summoned by a leader of the Western world,’ noted one who was present.[3]

Khodorkovsky and Deripaska were both at the gathering but Berezovsky, now himself under investigation by the prosecutors, was not invited.

Before those assembled in the cabinet room, Putin effectively read Russia’s richest and most powerful business clique the riot act. He would not review the privatizations but they would no longer enjoy special privileges inside the Kremlin. During the meeting, Putin insisted that Potanin pay the $140 million he was alleged to owe on the purchase of Norilsk Nickel. At times the meeting became heated and at one stage the President pointed at a well-known tycoon and accused him of being guilty of ‘oligophrenia’ (which means ‘mental retardation’). The plutocrats were stunned. It was not the script they had been expecting.

The new confrontational President concluded the meeting – which lasted two hours and forty minutes – by setting up a permanent mechanism for consultations between businessmen and the state. The days of cliques and coteries were gone, he warned. Now the relationship was to be institutionalized. Access to Putin would be restricted through quarterly meetings with the Russian Union of Industrialists and Entrepreneurs – in effect, the oligarchs’ trade union.

Putin’s message to the shocked gathering was simple: they could keep their ill-gotten gains provided they kept out of politics and paid their taxes. The details of the meeting were promptly leaked so that in a poll a week later 57 per cent of Russians said they already knew about it. Berezovsky, omitted from the gathering, accused those present of being cowardly. ‘They are as timid as rabbits,’ he sniffed after the meeting.[4]

This was a watershed moment in the story of the oligarchs and an event that was to prompt the steady exodus to London of one wave of super-rich Russians after another. Those present knew only too well that the tide had turned. In case they were in any doubt, Putin used his State of the Nation address on July 8 to condemn the ambitious tycoons and especially the way they controlled the media. ‘They want to influence the masses and show the political leadership that we need them, that they have us hooked, that we should be afraid of them,’ he declared. ‘Russia can no longer tolerate shadowy groups that divert money abroad and hire their own dubious security services.’ He later added, ‘We have a category of people who have become billionaires overnight. The state appointed them as billionaires. It simply gave out a huge amount of property, practically for free. They said it themselves: “I was appointed a billionaire.” They get the impression that the gods themselves slept on their heads, that everything is permitted to them.’[5]

The oligarchs, blinded by their own power and influence, had greatly underestimated the sardonic but humorless Putin. In public the new President was a cold, unsmiling bureaucrat. Apart from periodic outbursts of aggression, he rarely displayed emotion. Russian journalist Elena Tregubova says that when she first interviewed Putin in May 1997, she found him a ‘barely noticeable, boring little grey man… who seemed to disappear, artfully merging with the colors of his office’.[6] As is so often the case with autocrats, people seemed to be preoccupied with his eyes, ‘No one is born with a stare like Vladimir Putin’s,’ reported Time magazine. ‘The Russian President’s pale blue eyes are so cool, so devoid of emotion that the stare must have begun as an effect, the gesture of someone who understood that power might be achieved by the suppression of ordinary needs…’[7]

In private his aides say that the intense and brooding Putin is intelligent, honest, intensely loyal, and patriotic. ‘He smiled a lot, his body language was relaxed and informal, his eyes were soft, and his speech quiet,’ reflected British author John Laugh-land.[8] In stark contrast to his predecessor, he drinks Diet Coke and works out regularly. He is also able to relax, notably by listening to classical composers such as Brahms, Mozart, and Tchaikovsky. His favourite Beatles song is Yesterday. He has never sent an e-mail in his life, and, while he grew up in an officially atheist country, he believes in God.

When Vladimir Vladimirovich Putin was born in 1952, his 41-year-old mother Maria, a devout Orthodox Christian, defied the official state atheism and had him baptized. She had little education and did menial jobs – from a night- security guard to a glass washer in a laboratory. His father Vladimir fought in the Second World War and was badly wounded in one leg. After the war, he worked as a lathe operator in a car factory and was ferociously strict with his son. Putin’s only forebear of any note was his paternal grandfather, who had served as a cook to both Lenin and Stalin. The family lived in a fifth-floor communal apartment at 15 Baskov Lane in central St Petersburg, where the young Putin had to step over the rats in the entrance to the apartment block on his way to school. Universally known as ‘Volodya’, he was a serious, hard-working, but often angry child. His former school friends and teachers describe him as a frail but temperamental boy who never hesitated to challenge stronger kids. He has described himself as having been a poor student and a hooligan. ‘I was educated on the street,’ he told a biographer. ‘To live and be educated on the street is just like living in the jungle. I was disobedient and didn’t follow school rules.’[9]

Putin found discipline by learning ‘sambo’, a Soviet-era combination of judo and wrestling, at the age of twelve. It places a premium on quick moves, a calm demeanor, and an ability to not show any emotion or make a sound. A black belt, he won several inter-city competitions. Initially, he practiced the sport so as to build up his slender physique and to be able to stand up for himself in fights, but his developing obsession with the sport not only kept him out of trouble, it also made him somewhat reclusive.

Meanwhile, the teenage Putin dreamed of becoming a KGB spy like the Soviet heroes portrayed in books and films. His favorite television program was Seventeen Moments of Spring, a series about a Soviet spy operating in Nazi Germany. In his ninth year at school he visited the KGB headquarters in Leningrad. Told that the best way to get into the service was to obtain a law degree, in 1970 the aspiring agent enrolled at Leningrad State University, where he studied law and German and practiced judo.

In 1975, his final year at university, he was recruited by the KGB. Posted to Leningrad, he spent seven uneventful years in counter-intelligence. At the age of thirty, he married Lyudmila Aleksandrovna, then twenty-two, an outspoken, energetic air stewardess, and the couple had two daughters. He was next posted to Dresden in East Germany, where he worked closely with the Stasi, the secret police, in political intelligence and counter- espionage. It was an isolated life and not a prestigious posting. More favoured agents worked in Western capitals, or at least in East Berlin. But his perseverance brought him the nickname ‘Nachalnik’ (Russian for boss or chief). When the Berlin Wall came down in 1989, Putin and his KGB colleagues destroyed files in the KGB’s Dresden HQ. He remembers calling Moscow for orders. ‘Moscow kept silent,’ he said later. ‘It was as if the country no longer existed.’ In 1990 Lieutenant Colonel Putin retired from active KGB service and became Assistant Rector in charge of foreign relations at Leningrad State University, a significant reduction in status. ‘It was even less important than working for Intourist,’ said Oleg Kalugin, a former official in the Leningrad KGB. ‘This was a KGB cover rather than a career move. Putin was demobilized into the KGB reserve.’[10]

By this time, his former judo tutor Anatoly Sobchak had become the first democratically elected mayor of St Petersburg and he immediately recruited Putin as Chairman of the City Council’s International Relations Committee. By 1994, a year after his wife suffered a serious spinal injury in a car crash, Putin became First Deputy Mayor, gaining a reputation for probity and an ascetic lifestyle. Even his bitter enemy Berezovsky admits that his future nemesis was not corrupt: ‘He was the first bureaucrat that I met who did not ask for some money and he was absolutely professional.’[11]

In June 1996 Mayor Sobchak, having failed to address the economic crisis and rising levels of crime, lost his bid for reelection. His successor offered to keep Putin on but he declined and resigned out of loyalty to his former boss. Now unemployed in St Petersberg, he moved to Moscow where he became Deputy Chief of the presidential staff, overseeing the work of the provincial governments. Tough, aloof, and relentlessly focused, he was renowned for his industriousness and severity. In contrast to the wild, erratic Yeltsin, Putin was the solid, reliable apparatchik. Impressed by his honesty, diligence, and loyalty, by June 1998 Yeltsin was beginning to see him as a potential FSB Director. The following month the current incumbent Nikolai Kovalev was forced to resign over an internal scandal, whereupon Putin received a sudden summons to meet Prime Minister Kirienko at Moscow’s Sheremetyevo Airport. After they shook hands, Kirienko offered Putin his congratulations. When Putin asked why, he replied, ‘The decree is signed. You have been appointed director of the FSB.’[12]

Within days, Putin had purged the FSB of potential enemies, firing nearly a dozen senior officials and replacing them with loyal subordinates. Many of these came from the ‘Chekists’, the clan of agents based in St Petersburg when Putin was the director there, and named after the brutal early Soviet-era ‘Cheka’, or secret police. One man who welcomed his appointment was Berezovsky. At this point their interests coincided: Putin needed political allies and the oligarch was rid of at least one enemy, the spymaster Kovalev, who had been leaking damaging stories about his business methods. By 1998, Berezovsky had lost his post at the National Security Council and much of his former influence at the centre of power and saw the security apparatus – which mostly resented the rise of the oligarchs – as a real threat. To survive in the feral atmosphere of Russian politics, Berezovsky needed new, powerful allies and was delighted when Putin was appointed over more senior KGB figures. ‘I support him 100 per cent,’ he said. [13]

But within a few months, another cloud appeared on Berezovsky’s horizon: the appointment of a new hardline Prime Minister, Yevgeny Primakov, former head of foreign intelligence. The timing was especially bad for Berezovsky. Ordinary citizens blamed the oligarchs for bankrupting the economy, Yeltsin was mentally and physically in decline, and, amid the tensions and continuing jockeying for position that dominated Yeltsin’s second term, Berezovsky’s power base was slipping further away. When the calculating but now vulnerable Berezovsky realized that the Yeltsin ‘family’ was warming to Putin, he swung his own media empire behind the new FSB boss, later leading the cabal that backed him as Prime Minister. In return, he expected Putin to be both compliant and loyal.

Berezovsky now began courting Putin, once even inviting him on a five-day skiing holiday in Switzerland. The two became friends. On one occasion Putin called Berezovsky ‘the brother he never had’. On 22 February 1999 – by which point state investigations into his business empire had already been launched – Berezovsky threw a birthday party for his new partner, Yelena Gorbunova. The party was intended to be a small, private gathering, but Putin turned up uninvited with a huge bouquet of roses. This appeared to be a genuine act of solidarity towards Berezovsky because they shared a common enemy in the form of Prime Minister Primakov, a man who disliked Putin because he had been chosen to head the FSB over the Prime Minister’s far more senior colleagues.

In July 1999 Berezovsky flew to France, where Putin was staying in Biarritz with his wife and daughters. By this time, Primakov himself had been dismissed by Yeltsin and replaced with an interim Prime Minister, Sergei Stepashin. The two men met for lunch and Berezovsky, now sidelined but still well informed about Kremlin politicking, told Putin that Yeltsin was about to appoint him Prime Minister. The following month, as predicted, Yeltsin dismissed Stepashin and appointed Putin. He was Yeltsin’s fifth Prime Minister in seventeen months.

At first Putin was deeply unpopular, with an approval rating of only 5 per cent, mainly because of his association with the despised figures of Yeltsin and Berezovsky. What turned his fortunes was a series of devastating Moscow apartment bombings in September that led to 246 deaths...Putin responded aggressively, first bombing Chechnya and then initiating a land invasion. Militarism played well with the Russian people and the Prime Minister’s popularity soared.

Putin’s newly formed Unity Party took 23 per cent of the vote in the Duma elections in December 1999, compared with 13 per cent by Primakov’s Fatherland All-Russia Party. Yeltsin, now close to the end of his presidency, capitalized on the new popularity and offered the top post to Putin. When asked to take the reins, Putin initially declined, but Yeltsin was persistent. ‘Don’t say no,’ he pressed. Berezovsky also urged him to accept. In his New Year’s Eve address in 1999 Yeltsin famously announced his resignation and Putin’s appointment as interim President. This gave him the advantage of being able to campaign as an incumbent President. Three months later, in the 2000 presidential election, Putin took a remarkable 53 per cent of the vote. Kremlin watchers satirized his success, comparing it to Chauncey Gardiner’s unwitting rise to power as President of the United States in Jerzy Kosinski’s 1971 novel Being There. Berezovsky, who had continued to use the media to publicly declare his support for the way that he believed Putin would run Russia, expressed delight.

Putin’s dramatic decision to take on the oligarchs within weeks of coming to power had been carefully planned. He knew he had to stem the disastrous outflow of capital and quickly encouraged the authorities to toughen up on the collection of taxes. He had come to two conclusions about the oligarchs.

First, as Yeltsin had also discovered, the oligarchs had the potential to be as – if not more – powerful than the President himself.

Second, because the vast majority of ordinary Russians loathed them, Putin knew there would be a beneficial political dividend in being seen to take them on.

Some oligarchs certainly had no shortage of enemies, among them the senior ranks of the security apparatus whose power had ebbed away during the Yeltsin years. They resented the way that these tycoons had sapped their own political strength and reaped a vast financial windfall. They saw them as upstarts. Few of them had served as senior officials during the Soviet era and they were viewed as outsiders. When Putin, so recently the head of the FSB, came to power, the security and intelligence apparatchiks, especially the ‘Chekists’, returned to favor. Of the President’s first twenty-four high-level appointments, ten were drawn from the ranks of the old KGB. This group, known as the siloviki – individuals with backgrounds in the security and military services – now saw their chance for revenge. ‘A group of FSB operatives, dispatched undercover to work in the Russian government, is successfully fulfilling its task,’ said the new President. He was only half joking.[14]

Putin also had a powerful collective ally in the Russian people. While the oligarchs enriched themselves, by the end of the 1990s the government could claim that as many as 35 per cent of Russians lived below the official poverty line.[15] Many felt that the nation’s resources had been sucked dry by what Karl Marx had referred to as ‘Vampire Capitalism’, whereby ‘the vampire will not let go while there remains a single muscle, sinew, or drop of blood to be exploited’.

To show how they feel, Russians love to tell popular jokes to foreign visitors.

‘A group of “new Russian” businessmen were meeting in a posh Moscow restaurant where the décor was of a very high standard. A waiter showed them to their tables and pointed out that the table was made of very expensive marble and that they should put nothing heavy on it, such as a briefcase. He went away to get vodkas and when he returned he was horrified to see a bulging briefcase lying on the table. ‘I thought I told you not to put briefcases on the table,’ he said. The man replied, ‘That’s not my briefcase. It’s my wallet.’

The oligarchs were only too aware of the widespread resentment. As Anatoly Chubais, Yeltsin’s Privatization Minister and chief political architect of the giant giveaways in the mid-1990s, acknowledged, ‘Forty million Russians are convinced that I am a scoundrel, a thief, a criminal, or a CIA agent, who deserves to be shot, hanged, or drawn and quartered’.[16]

NOTES

Chapter 1

1 Michael Freedman, Forbes, 23 May 2005.

2 Guy Adams, Independent on Sunday, 17 December 2006.

3 James Harding, The Times, 13 March 2007.

4 James Meek, Guardian, 17 April 2006.

5 Sergei Guriev and Andrei Rachinsky, Ownership Concentration in Russian Industry, mimeo, October 2004.

6 Moscow Times, 30 January 2008.

7 Ibid.

8 Elinor Slater and Robert Slater, Great Jewish Men, Jonathan David Publishers, 1996, p. 60.

9 The Times, 7 September 2002.

10 Jonathan Dee, New York Times, 9 September 2007.

11 Forbes, 16 November 2006.

12 Mark Milner and Luke Harding, Guardian, 1 May 2008.

13 Dominic Midgley, Spectator, 8 October 2005.

14 Robert Service, Observer, 22 July 2007.

Chapter 2

1 D. Midgeley and C. Hutchins, Abramovich: The Billionaire From Nowhere, HarperCollins, 2005, p. 55.

2 From www.newyorkerfilms.com, October 2002.

3 BBC News Online, October 2002.

4 Financial Times, 1 November 1996.

5 Speech to the Frontline Club, June 2007.

6 Ibid.

7 7WPS Monitoring Agency, July 2002.

8 Paul Klebnikov, Godfather of the Kremlin, Harcourt, 2000, p. 118.

9 Oliver Harvey and Nick Parker, Sun, 16 March 2007.

10 Dominic Midgley, Management Today, 28 October 2004.

11 P. Gumbel, Time, 2 November 2003.

12 Chrystia Freeland, Sale of the Century, Little Brown, 2000, p. 117.

13 Michael Gillard, ‘From the Kremlin to Knightsbridge’, BBC Radio 4, November 2006.

14 Strobe Talbott, The Russia Hand, Random House, 2003, p. 207.

15 M. Kramer, ‘Rescuing Boris’ Time, 15 July 1996.

16 A. Cowell, The Terminal Spy, Doubleday, 2008, p. 56.

17 Kramer, op. cit.

18 Ibid.

19 Klebnikov, op. cit., p. 218.

20 Financial Times, 26 April 2003.

21 Talbot, op. cit., p. 207.

22 Klebnikov, op. cit., p. 201.

23 Talbot, op. cit., p. 207.

24 D. Midgley and C. Hutchins, Abramovich: The Billionaire from Nowhere, HarperCollins, 2004, p. 56.

25 Kommersant, 16 November 1995.

26 Andrew Jack, Inside Putin’s Russia, Granta, 2005, p. 83.

27 John Thornhill, Financial Times, 28 August 1998.

28 See, for example O. Kryshtanovskaya and S. White, ‘The Rise of the Russian Business Elite’, Communist and Post- Communist Studies, 38 (2005), p. 298.

29 Quoted in A. Osborn, ‘The World’s Richest Russian Is Sued for $3 billion in London’, Independent on Sunday, 25 February 2007.

30 Interview with Financial Times, 13 July 2007.

31 P. Boone and D. Rodionov, ‘Rent Seeking in Russia and the CIS’, Brunswick UBS, Warburg, Moscow, 2002.

32 Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism, Allen Lane, 2007, p. 249.

33 Interviewed in Counterpunch, 27 February 2004.

34 ‘Question Time’, BBC Television, 7 June 2007.

35 M. E. de Boyrie, S. J. Pak and J. S. Zdanowicz, ‘Estimating the Magnitude of Capital Flight Due to Abnormal Pricing in International Trade. The Russia-US Case’, CIBER Working Paper, Florida International University, 2004.

36 Michael Freedman, ‘Welcome to Londongrad’, Forbes Global, 23 May 2005; see R. Skidelsky, St Petersburg Times, 4 January 2003; David Satter, Darkness at Dawn: The Rise of the Russian Criminal State, Yale University Press, 2003, p. 55.

37 Thomas L. Friedman, New York Times, 19 April 2000.

38 Nick Kochan, The Washing Machine, Duckworth, 2005, p. 17.

39 C. Freeland, Sale of the Century, Abacus, 2005, p. 180.

40 S. F. Cohen, Failed Crusade, Norton, 2000, p. 122.

41 ‘Why I Became a Russian Oligarch’, Financial Times, 29 June 2000.

42 Quoted in Observer, 30 August 1998.

Chapter 3

1 A. Goldfarb with M. Litvinenko, Death of a Dissident, Simon & Schuster, 2007, p. 206.

2 Vladimir Voinovich, ‘Russia’s Blank Slate’, New York Times, 30 March 2000.

3 D. Midgley and C. Hutchins, Abramovich: The Billionaire from Nowhere, HarperCollins, 2004, p. 114.

4 East Constitutional Review, vol. 19, no. 4, Fall 2000.

5 Moscow Times, 7 October 2003.

6 Goldfarb with Litvinenko, op. cit., p. 183.

7 Adi Ignattius, ‘A Tsar is Born’, Time, vol. 170, no. 27, 31 December 2007.

8 J. Laughland, ‘Putin Has Been Vilified by the West – but He is Still a Great Leader’, Daily Mail, 22 September 2007.

9 Vladimir Isachenkov, ‘New Putin Biography on Shelves’, Associated Press, 17 January 2002.

10 R. Polonsky, ‘The Spy Who Came in from the Cold’, New Statesman, 15 March 2004.

11 Speaking to the Frontline Club, 6 June 2007.

12 Ignattius, op. cit.

13 Goldfarb with Litvinenko, op. cit., p. 135.

14 ‘Leaders: Putin’s People, Russia’s Government’, The Economist, 25 August 2007.

15 Labour Minister Sergey Kalashnikov, news conference, 27 October 1999.

16 Interview with Anatoly Chubais, Der Spiegel, 25 September 2007.

17 Speaking on ‘Rich in Russia’, Frontline, PBS, October 2003.

18 ‘Aeroflot, an Oligarch and a Complex Business Deal’, Financial Times, 28 July 2000.

19 P. Klebnikov, Godfather of the Kremlin, Harcourt, 2000, pp. 286-7.

20 Goldfarb with Litvinenko, op. cit., p. 181.

21 Ibid., p. 182.

22 David E. Hoffman, The Oligarchs, Public Affairs, 2002, p. 487.

23 Goldfarb with Litvinenko, op. cit., p. 206.

24 Klebnikov, op. cit., p. 16.

25 Simon Bell, ‘Russian Billionaires Beware’, Daily Telegraph, 27 July 2003.

26 ‘Particulars of Claim: Boris Berezovsky v Roman Abramovich’, Commercial Court, High Court, 8 January 2008.

27 G. York, ‘Kremlin Tightens Muzzle on Media’, Toronto Globe & Mail, 21 November 2000.

28 Vanity Fair, July 2000.