Deception (4 page)

Neither the Simm case, nor the exposure of Ms Chapman and her colleagues, have properly woken up public opinion and officialdom. This book presents bluntly and independently a message that officials find hard to articulate openly, and that the public seems so unwilling to hear. It is this: Russian spies' activities are not just a lingering spasm of old Soviet institutions, twitching like the tail of a dying dinosaur. They are part of a wider effort to penetrate and manipulate, which targets the weakest parts of our system: its open and trusting approach to outsiders and newcomers. Because this threat is underestimated or outright ignored, it is especially potent. It is part of a world, espionage, of which outsiders mostly know little and understand less.

Drawing together the threads of the past and the present, this book will show how the old KGB techniques of deception and subversion are now deployed in the service of new aims. The battle lines were more clearly drawn in the days of the Cold War, when the threat was of communist victory. The corrupt autocracy that rules Russia now is playing by capitalist rules – and the threat is even more corrosive. Yet some things are the same. Russia's new spies, like their Soviet predecessors, engage in the subversion, manipulation and penetration of the West. They also defend a regime that, as I show in the following chapters, is tyrannical, criminal and murderous.

1

Looting and Murder

Life in Moscow can seem remarkably normal. Middle-class professionals wear the same clothes, drive the same cars, take the same holidays, eat the same food and do the same jobs as millions of their counterparts in cities all round the world. This is especially so in the field of finance. Shares and profits rise on the back of Russia's oil and gas boom, and the consumption it pays for. Financiers invest; their lawyers handle the details and deal with problems. Serving them is a growing Russian middle class of articulate, confident English-speaking professionals who could easily do the same jobs in New York, London, Frankfurt or Dubai. For many people, especially those who believe Russia is on the right track, the growth of the financial and legal system in Moscow is one of the great grounds for optimism. Other parts of life in Russia, from traffic-clogged big-city streets and corrupt officialdom to terrorism and bubbling civil war along the country's southern fringe, may be depressing, chaotic, dark and even dangerous, but that world seldom touches the bright, snazzily furnished offices of central Moscow.

In the case of Sergei Magnitsky, however, it did. His name is not well known, though it deserves to be. His story provides a moral and human backdrop to the subsequent chapters on the wiles and ways of Russia's spies. Aged only
37
when he died in
2009
, Mr Magnitsky was part of the first generation of Russians for nearly a century whose lives were unclouded by fear. When Soviet controls over speech, belief and travel withered, he was a teenager. He was well-educated in a way that previous cohorts of Russian students could only dream of. His mind was not shaped by forced study of the perverse doctrines of Marxism–Leninism but by adherence to the crystalline principles of the law. Neither brutalised by Soviet-era conscription nor burdened by compromises of adult life under totalitarianism, he enjoyed the middle-class comforts and certainties that are taken for granted in the West and had been unimaginable in the Soviet Union. He had able colleagues, stimulating challenges and a happy home. His dream, like the half-successful reformers of the Tsarist era a century earlier, was for Russia to be a law-governed state. He was the sort of person who made even sceptics feel that Russia's long-term future was bright.

Polished and polyglot, Mr Magnitsky was the kind of Russian that readers of this book could easily encounter. You might have a drink with him on a foreign holiday, hear him at a seminar, or find him sitting across the table at a business meeting. In that sense, he is rather like the other Russians covered in this book: the undercover spies in the West. It is easy to imagine him sipping a cocktail in London with Ms Chapman, or strolling the streets of Boston in conversation with Donald Heathfield – her superspy colleague who worked as a management consultant in America. But while these people were pursuing their clandestine missions on behalf of Russia's spymasters, Mr Magnitsky was involved in another story.
¹
It involves colossal sums of money, extraordinary cruelty and impunity for wrongdoers. The cast includes senior members of the FSB, working hand in hand with organised crime and senior state officials.

I will begin by introducing the man who unwittingly brought Mr Magnitsky to his doom, and since then has campaigned untiringly for his cause. William (‘Bill') Browder is an American-born financier, now with British nationality, who used to be one of the best-known Western investors in Russia. He is an abrasive, mercurial figure, bursting with nervous energy, capable of charm and fury in quick succession. He has a fascinating family background: his grandfather Earl Browder was a leader of the American Communist Party. But it was capitalism not communism that entranced the grandson. He spotted in the
1990
s that many outsiders were overestimating the risks of doing business in Russia. Admittedly, the dangers were great: the rule of law was weak, property rights flimsy, political stability uncertain, the economy rocky, and crime and corruption pervasive. But daunting does not mean impossible. The companies and shares on sale were not valueless, just cheap. If the situation improved just a little (or if even perceptions of it did) then the gains to be made were potentially huge. Suppose, for example, that investors reckoned that an ill-run Russian oil company, instead of being worth a mere
1
per cent of a comparable foreign one, was instead worth
10
per cent. That would raise the value of its shares tenfold – meaning a colossal profit for someone who bought before the perception changed.

Mr Browder's investment company, Hermitage Capital Management, therefore pursued a threefold strategy. First, it bought shares in companies that owned an underlying asset, such as oil, gas or minerals. Second, he talked up Russia as an investment destination, insisting that it was merely ‘bad' instead of outright ‘horrible'.
ⁱ
His third tactic was to highlight abuses of shareholder rights. His sharp-eyed team of analysts pored over company accounts and other documents, looking for evidence of fraud and waste. When they found them, Mr Browder would launch lawsuits, media campaigns and other stunts to seek redress.
²

This was well timed. Some Russian companies were already realising that in order to make the most of their stock-exchange listings, they had to pay at least a semblance of attention to outside investors' interests. From
2000
onwards, Mr Browder's efforts also coincided with a push from the Kremlin, which disliked the way over-mighty ‘oligarchs' (politically powerful tycoons) were running the country's biggest companies in their private interests. The coincidence of interest was short-lived. The Putin regime's longer-term aim was not to promote good corporate governance and shareholder value, but to seize money and power for itself. But that was for later. For nearly a decade, Mr Browder and Hermitage flourished mightily. Their campaigns brought some quick victories, some slower ones, and sometimes failed altogether, but the hard work and high profile at least helped justify the hefty management charges the investors paid. The ‘Hermitage effect',
³
as the company terms it, received the ultimate accolade in
2002
: it was the subject of a Harvard Business School case study.
⁴
During the period between Mr Putin's arrival in office in
2000
and the fund's moving to London in
2005
, the value of Hermitage's investments rose eightfold; during the whole period of its existence, the increase was thirty-fivefold. Few in the history of finance can boast such a record.

I did not always get on with Mr Browder during my time in Moscow as bureau chief for
the
Economist
from
1998
to
2002
. Our disputes may look like ancient history now but they were sharp at the time. In particular, although I admired his energy and brains, I disliked his backing for Mr Putin's regime. The new government had in my view brought superficial stability, but at far too high a price. Moreover I was unmoved by the plight of foreign investors who had knowingly put their money into companies run by crooks, nincompoops and political cronies, and were then surprised to find that those businesses were run badly. If you buy shares in Russia, you should expect to be defrauded, rather as if you go mud-wrestling you expect to get dirty.

Our sharpest disagreement came in
2003
after I left Russia, when we took opposite sides over the defining issue of the early Putin era. Mr Browder endorsed the arrest of Mikhail Khodorkovsky, then Russia's richest man, who had defied Mr Putin, not least by turning up tieless to a meeting in the Kremlin – a huge snub in protocol-conscious Russia. Mr Khodorkovsky, an energy tycoon, had also put a large number of parliamentarians on the payroll to bolster his political clout and was planning a deal with a big American oil company in defiance of Kremlin guidelines. He was certainly an obstacle to Mr Putin's plan to seize the commanding heights of power in Russia. Some thought he might even want to displace Mr Putin from the top job (in his first years in office, the Russian president had seemed a grey and somewhat unimpressive figure). Mr Putin's vengeance was decisive and ruthless. Mr Khodorkovsky was jailed on flimsy charges and his company Yukos (which had many foreign shareholders) was bankrupted, with its assets disposed of in a dodgy auction where Kremlin cronies bought them cheaply.
⁵
I agreed with Mr Browder that Mr Khodorkovsky had in previous years abused the rights of his minority shareholders, and I did not see him simply as a martyr to repression. But I reckoned that the balance between the tycoon's past misdeeds and later virtues mattered less than the authorities' flagrant abuse of the courts in a political vendetta.

Mr Browder could afford to discount my criticism. He was making millions. But he was also making more powerful enemies elsewhere: every dollar not stolen as a result of his efforts to stop corporate sleaze dented the income of some corrupt and powerful person. In November
2005
border guards turned him back from Moscow's Sheremetyevo airport, citing undisclosed national security grounds.
⁶
Returning to London, he stayed bullish on Russia, lobbying to overturn the authorities' decision and insisting that his plight was a mere misunderstanding. But at a summit meeting in St Petersburg in July
2006
^j
a journalist raised Mr Browder's case at a press conference. Mr Putin replied that he had never heard of Mr Browder (which was implausible) but that he could ‘imagine that this person had broken the laws of our country'
⁷
. At that point, Mr Browder says, he gave up trying to return to Russia: the signal of deep official displeasure was unambiguous and he did not want to share Mr Khodorkovsky's fate. Behind the scenes he had already begun liquidating his holdings and pulling out his staff. With Mr Browder no longer at the helm in Moscow, investors were asking for their money back; other emerging markets looked more attractive. As it happened, the move was not just prescient but profitable. Shortly afterwards, the world financial crisis broke, and Russian share and bond prices plunged. Mr Browder's investors escaped without a scratch.

At this stage, the story was just one of many such tales in Russia: the country's recent history is littered with investors who cross swords with the authorities and lose. The lucky ones negotiate a deal; the unlucky ones are glad to leave the country alive. But in Mr Browder's case, his enforced absence was just the prologue to a tragedy worthy of Dostoevsky. It involved a mammoth fraud, in which officials stole three companies owned by Mr Browder's fund and used them to swindle the citizens of Russia. The perpetrators of this crime were not some rogue bunch of junior officials. On the contrary, they were the unit of the Interior Ministry charged with safeguarding their taxpayers' interests. They worked in cahoots with senior officers of the FSB's K Directorate, which is supposed to deal with ‘economic crimes'.

Readers may find the term ‘economic crimes' unfamiliar: in other criminal justice systems it could be rendered as ‘white-collar crime'. But in a Russian context it is redolent of the Soviet era, in which the same KGB department persecuted the black market – the now-forgotten trade in everything from purloined state property to foreign currency, antiques, second-hand goods or sexual services. Even in Soviet days, persecution was mixed with profit. Pay-offs, particularly from the Brezhnev era onwards, were rife. Confiscated goods had a habit of ending up in the dachas of senior officers. Prostitutes found they could stay in business by offering their services free of charge to the right person, or collaborating in entrapment schemes. The difference under capitalism is that the sums involved in corruption now are greater and the means more sophisticated.

An agency such as K Directorate in a Western country would deal with corporate fraud, excise scams, money-laundering and high-level corruption, and all other overlaps between organised criminality and the financial system. Not in Russia. Unfair though this judgement may be to those of its officers who genuinely want to serve the public interest, it has become in most cases a unit for perpetrating economic crime, not fighting it. In late January
2007
Mr Browder seized on a chance personal meeting with Dmitry Medvedev, then the leading presidential candidate, and received a promise of help with his visa. But the actual reaction was a kind of ‘help' normally seen in gangster movies. In mid February
2007
a senior figure from the Interior Ministry tax-crimes department, Lieutenant Colonel Artyom Kuznetsov, telephoned the head of research at Hermitage in Moscow, requesting an ‘informal meeting' for a report he said he was writing on Mr Browder's visa. Depending on how Hermitage ‘behaved', the visa could be issued, he said: ‘The sooner we meet and you provide what is necessary, the sooner your problems will disappear.' The company rejected what it (reasonably in a Russian context) reckoned was an extortion attempt. In retrospect, it was probably even more sinister: a ruse to get hold of the company's documents, as the first stage in a planned looting spree.