Most of the rest of Soviet industry passed into the hands of the young bankers, in auctions that were widely seen as rigged. Potanin won the prize he’d long coveted – a controlling stake in the world’s biggest producer of nickel and platinum, Norilsk Nickel, a sprawling plant high above the Arctic Circle whose profits in 1995 stood at $1.2 billion. He’d done so by extending a loan of just $170 million to the government – and when, as expected, the still cash-strapped government defaulted on the loan after Yeltsin secured his election victory, the way was clear for Potanin to win the stake in an auction for little more than the loan price. Khodorkovsky had long been targeting Yukos, an oil producer in west Siberia which controlled some of Russia’s largest reserves. He took control of it after lending the government $159 million for a 45 per cent stake, and then paying a further $150 million in investment for an additional 33 per cent. Another oil giant, Sibneft, was won for $100 million by Boris Berezovsky, who already controlled sales at Russia’s biggest carmaker and chaired a bank of his own. Most of these bankers were still barely in their thirties, but with the help of sympathetic government officials running the auction process, they were able to secure the foundations of fortunes that within a few years would be worth billions, and then tens of billions, of dollars. Berezovsky was soon crowing that a group of seven bankers controlled 50 per cent of the nation’s economy.[95]
The loans-for-shares auctions marked a huge shift in the control of the economy. It was the moment the tycoons were transformed from mere bankers to owners of the biggest assets in the country, with access to some of the most lucrative cash flows. ‘This is when they started to reinvent themselves,’ said Christian Michel. ‘They acquired real assets. They became much more than banks.’[96]
By the end of the nineties, the young tycoons were starting to turn around the Soviet legacy of falling production, deep debts and neglect. But for the members of the security services that had helped create these new billionaires, the loans-for-shares auctions was a moment they would never forgive or forget, and would be the kernel for the KGB’s later revanche. Before then, in the shadows, the KGB men had still been able to control much of the cash flow from the nation’s oil wealth. But now they’d been outwitted and outpaced, and the financial reins had largely been taken out of their hands. ‘This was the turning point when [the young tycoons] took control,’ said Rair Simonyan, the ally of Yevgeny Primakov who’d worked on the early perestroika reforms. ‘It changed the entire paradigm.’[97]
But in those days, the tycoons of Russia’s new order were giddy at their new wealth. They were fast becoming oligarchs who held considerable sway over the weakened Yeltsin government. The remaining members of the old-guard security services who had served in government had been ousted amid scandal in the run-up to the presidential elections, and Western-leaning reformers like Chubais had been left to take the lead. Fresh from his successful engineering of the loans-for-shares sell-offs, Potanin took a post as Yeltsin’s deputy prime minister, while Berezovsky was appointed secretary of the Security Council. Chubais became Yeltsin’s chief of staff. It was the apotheosis of their era. The country, it seemed, was theirs. The forces of the KGB appeared to be receding into the background.
But, said the former senior foreign-intelligence operative Yury Shvets, the oligarchs ‘all forgot to whom they owed a debt’.[98] In the rush to shore up their positions, in the battle to accumulate more wealth, Khodorkovsky and the others didn’t notice that nearby, in St Petersburg, there was a chill in the air. Things were being run differently there. Isolated from the goldrush of Moscow’s economic boom, the forces of the KGB were exerting far greater control, in a city where the economy was tougher and darker, in the violent scrabble for cash.
ST PETERSBURG – On the south-western edge of St Petersburg, where the Gulf of Finland starts to join the Baltic Sea, a tangle of cranes and containers juts out across the elegant façades of the pre-Revolutionary palaces across the bay. On one small island, twisted heaps of scrap metal and piles of timber lie in wait for tankers, while across a channel the red-brick buildings that were once the customs house and the warehouses for the city’s finest pre-Revolutionary merchants somehow still stand, half-abandoned among the heavy machinery. Far out on the western edge, a concrete jetty leads to the place sometimes called the ‘Golden Gates’, a concrete sprawl of oil-storage facilities that mark St Petersburg’s most strategic outpost, the oil terminal that was the battleground for some of the 1990s’ most vicious bandit wars.
The archipelago of islands is home to St Petersburg’s sea port, and through its channels Russia’s tumultuous history has always run deep. When Peter the Great founded St Petersburg in the early eighteenth century, he did so in the hope that it would become Russia’s greatest sea port, a vital link between the vast country’s Eurasian land mass and the markets of the West. Thousands of serfs toiled and died to realise his vision of stately Baroque mansions and elegant canals rising out of the freezing and muddy marshes. St Petersburg was always intended as Russia’s ‘window on the West’, a port city that would drag the country kicking and screaming out of its medieval and Asiatic past, no matter what the cost.
Ships carrying cargoes of cloth, tea, silk and spices began to arrive in ever greater numbers from the colonial empires of the West, while Russia’s imperial riches of timber, furs, hemp and potash steamed out. St Petersburg’s merchants and noblemen thrived, but as the city’s population exploded, its workers were among the world’s most downtrodden. Dockers hauled cargoes on and off the ships on their backs, unprotected from the ice and bitter winds that gripped the port for half of the year. When Vladimir Lenin gathered the city’s workers to overthrow the rule of the provisional government in 1917, the dockers were foremost among them. When the city, by then named Leningrad, came under blockade by the Nazis during the Second World War, the sea port was on the front line of the heart-rending struggles to survive starvation and bombs.
And when Russia juddered out of its third revolution of the twentieth century, the St Petersburg sea port again had a defining role to play. It became the ground zero for an alliance between the KGB and organised crime that was to expand its influence across Russia, and later into Western markets and institutions too. It was the starting point for the business alliances of the city’s deputy mayor, Vladimir Putin, who worked closely with the organised-crime leader who ran it, and the oil trader who gained a monopoly on exports through its oil terminal. The relationships forged then, through an elaborate web of barter and export deals, became a model for how Putin’s Russia would be run.
In the early nineties, the port was one of the darkest places in a city riven by gangland shootings and violent battles for cash. ‘The story of the sea port is a very criminal and dirty story,’ said one former senior official in the St Petersburg city council.[1] ‘The port was totally criminalised. There was a lot of shooting,’ according to a former member of the biggest local crime gang, the Tambov group.[2]
The group who eventually took it over were part of a nexus of organised-crime and KGB men that came to rule the roost in St Petersburg in the nineties, and Vladimir Putin was at the centre of it. If in Moscow the forces of the KGB had stayed largely in the shadows, in St Petersburg they were much more visible. St Petersburg’s economy was far smaller than Moscow’s, the battle for cash much more vicious, and the mayor’s office had tentacles extending into most businesses. The main reason for the potency of the KGB’s reach in St Petersburg was that mayor Anatoly Sobchak had little interest in the day-to-day running of the city. He left it to Putin, who ran the foreign-relations committee, which oversaw all trade and much of the rest of the city’s business, and to his other deputy, Vladimir Yakovlev, who was in charge of the city’s economic affairs.
Sobchak and his deputies moved the mayor’s office from the Marinsky Palace, where