Londongrad: From Russia with Cash; The Inside Story of the Oligarchs

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.

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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.’

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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.

(#litres_trial_promo) 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.’

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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.’

(#litres_trial_promo) 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.

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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.’

(#litres_trial_promo) 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.’

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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’.

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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.’

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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.

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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.’

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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.

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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.’

(#litres_trial_promo) 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’.

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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.’

(#litres_trial_promo) 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.’

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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.’