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.’
‘Boris, if you go down this road, I predict in a year’s time you will be in exile…or worse, sitting in jail’
- ALEX GOLDFARB to Boris Berezovsky1
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