In the second article of a series of about the material in Catherine Belton’s book a key idea comes from her chief informant, Pugachev, the Russian Orthodox exile, former banker of Putin and the security officials (siloviki), who is reported on the last page of this book as saying, “This is the tragedy of twentieth-century Russia. The revolution was never complete.” What he is referring to is how those trying to activate a free-market in Russia had underestimated the power of the security men, who have ultimately returned Russia to autocracy.
One of the main tools these security men used was the ability to control flows of money to and from the West, even during the days of the Iron Curtain. This book has illuminating material from the days when Putin was a KGB officer in Dresden, manipulating trade deals and money flows, with the help of the East German Stasi. This was money circulating out of reach of the Russian fiscus, funds that could be used for bribery and corruption, both in the West and inside Russia. The argument in this book is that this way of operating never really stopped: the KGB may have changed its name to FSB, and the Iron Curtain fell, but the security men were determined not to lose power. The main individual who led them forward into increased wealth and status was Putin.
He arrived aged 39 in St Petersburg in 1991 when the city was facing collapse and a desperate food shortage. Sobchak, the mayor, came to rely on Putin: “What emerged out of the chaos and collapse – and Sobchak’s ineffectiveness -was an alliance between Putin, his KGB allies and organised crime that sought to run much of the city’s economy for their own benefit.” With the aid of the KGB slush funds, these people, allied to the mobsters, took over the sea-port and the oil terminal by “murder and raiding…the arms of the Tambov group are covered in blood”.
KGB test-flies market economy
The first experiments with capitalist business had begun with KGB “parts of the KGB foreign-intelligence elite had begun preparing for a market transition…since 1982”. They had first begun their experiments by empowering the black marketeers who operated in defiance of the State controlled economy. “What began as corruption within the system became a KGB-cultivated petri dish for the future market economy, and a stopgap to fill the shortages of the command economy.”
The KGB enabled the Communist Party of the 1980s to set up a network of friendly firms in the West, often led by Russian emigres in Vienna, Switzerland or New York. They built up their slush funds by false accounting of Russia’s vast resources exported to the West. This also required a system of trusted bankers dealing with hard currency transfers into and out of the Party’s coffers. Moscow legend is that Khodorkovsky’s Menatep bank was one of the main conduits syphoning Soviet wealth abroad.
Gorby in – Gorby out
Under Gorbachev’s perestroika, the process was running out of control. He was a gradualist, but “the handpicked young wolves of Russia’s economic transition were rallying behind Yeltsin”, elected a President of the Russian Federation in the first such election (partly financed by bankers such as Khodorkovsky).
When Gorbachev was pushed aside, Yeltsin seemed ready to lead market reforms with bright economists like Gaidar in his government. Gaidar had worked undercover as Pravda’s correspondent in Cuba but, really, he was studying the workings of the economy. He became an influential public spokesman for full market reforms in the 1990s aided by teams of American economists.
Black Market winners
But privatisation of State enterprises at a time of hyperinflation benefited only the black marketeers, the favoured tycoons of the inner circle, and the bankers with access to foreign capital via the slush funds. The government authorised the tycoons’ banks to hold strategic funds from the Russian budget on deposit. “It was a get-rich quick scheme for the chosen favourites of the Yeltsin regime.” The young tycoons were getting rich and out of control of their KGB mentors.
By 1995, the Yeltsin regime was in trouble and feared the return of the Communists. At this point the tycoons (bankers) made an offer of loans to the Government in return for shares in key State enterprises. This outmanoeuvred the KGB, but it opened the way for later trials of these same tycoons (initiated by the come-back KGB/FSB under Putin) on charges of corruption, or dodging tax.
By the end of the 1990s the young tycoons “were starting to turn around the Soviet legacy of falling production, deep debts and neglect.” But trouble was brewing for the Yeltsin family with scandals about corrupt funds in Swiss and New York banks. There was also the communist threat from Primatov who was hostile to Yeltsin and the tycoons.
At this point Pugachev, the banker, helped engineer Putin’s appearance as Yeltsin’s successor, in spite of hints from Sobchak and Berezovsky about Putin’s links to the KGB. “The Yeltsin family had in fact succumbed to what was a creeping coup by the security men”.
Chechnya helped Putin’s advancement
What enhanced Putin’s public profile was an escalation of the Chechen conflict, with a car bomb in Dagestan and an apartment bomb in Moscow that killed 94. Putin was then seen leading the military response to this “a shot in the arm for Russia’s humiliated sense of national identity.” There were further incidents of attempted Moscow apartment bombings. But then rumours surfaced that all these might have been KGB/FSB designed episodes to enhance Putin, with evidence later forthcoming. As one Russian tycoon later commented “I know only one thing: that they are capable of more than this.”
Another article about the Putin’s People material in this book is due in Kent Bylines next week
The book is available for reserve in Kent libraries