Kremlin Energy Politics and Putin’s Seizure of Russia’s Strategic Resources
This article explains how early in his presidency Vladimir Putin seized control of Russia’s geostrategic resources and weaponized corruption to consolidate power at home and spread influence abroad. It is the tenth article in the series “Putin’s Russia, Global Corruption, and the Road to the 2016 Election.” While it is not necessary to read earlier entries, it is recommended.
The first article provides a brief history of Russia’s intelligence services and a definition of “Disinformation” and “Active Measures.”
The second article describes Vladimir Putin’s early life and his experiences as a KGB Officer in Russia and East Germany.
The third article describes how elements of the KGB laundered billions of dollars of Communist Party money into the West as the USSR collapsed.
The fourth article describes the rise of the post-Soviet oligarchic system and the role Eurasian organized crime played in facilitating it.
The fifth article covers Putin’s tenure as Deputy Mayor of St. Petersburg and his enduring relationship with organized crime.
The sixth article covers the organized crime and intelligence service links to the Bank of New York money laundering scandal.
The seventh article covers Vladimir Putin’s rise to the Russian Presidency and the mysterious and controversial September 1999 Moscow Apartment Bombings.
The eighth article covers the mysterious series of political assassinations and terrorist attacks that convulsed Putin’s early reign.
The ninth article covers how Putin consolidated the “vertical of power” at home through taming the oligarchs and controlling televised media.
This article is an excerpt from my book, While We Slept: Vladimir Putin, Donald Trump, and the Corruption of American Democracy, available here.
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Putin Seizes Control Over the Russian Natural Gas Giant Gazprom
Contemporaneous with his efforts to weaken the oligarchs and curb the free press, Putin set about seizing control over Gazprom, Russia’s largest corporation and the crown jewel of Russia’s vast energy wealth. Russia has the world’s largest reserves of natural gas.
In June of 2000, Putin removed Viktor Chernomydrin as chairman of Gazprom’s board and replaced him with Dmitri Medvedev. Medvedev, Russia’s future puppet president, had worked with Putin in the St. Petersburg mayoral administration.
Chernomyrdin was made the ambassador to Ukraine, which was at that time reliant on Gazprom for its energy needs.
Putin’s interest in Russia’s natural resource wealth dates back to his days in St. Petersburg. He holds a degree from the St. Petersburg Mining Institute, which was awarded to him in 1996.
During this time period, Putin regularly met with Vladimir Litvinenko (no relation to the assassinated FSB defector), the school’s rector, as well as his close friends Igor Sechin and Vladimir Zubkov, who were studying similar issues related energy, economics and natural resource wealth.
Following Litvinenko’s lead, Putin, Sechin and Zubkov all supported a strategy that restored state control over Russia’s oil and gas resources.
“They’re the main instrument in our hands — particularly Putin’s — and our strongest argument in geopolitics,” Litvenenko stated.
Putin plagiarized large sections of his dissertation. Litvinenko maintained his relationship with Putin over the years and is now known as “the richest rector in Russia.” Litvinenko’s daughter Olga has claimed that her father wrote Putin’s dissertation himself.
As Russia’s largest company, Gazprom is used by the Kremlin to advance its geostrategic interests. As far back as the Arab Oil Embargo of 1973, the manipulation of energy supplies has been understood to have both financial and political consequences.
Central and Eastern Europe have little to no energy resources of their own and are increasingly reliant on natural gas from Russia to keep the lights on. Germany in particular has been interested in cheap Russian natural gas to fuel the largest economy in the Eurozone.
American Presidents dating back to Ronald Reagan have been concerned about the potential adverse consequences of having Europe beholden to Russia for its energy needs.
Gazprom was created from the old Soviet Ministry of Gas. Viktor Chernomydrin, who served as its final minister in the dying days of the Soviet Union, changed the ministry’s legal status in 1989 to make it an industrial association.
Though Gazprom was partially privatized, it maintained all of the assets previously held by the state, including production, transportation, distribution, sales and regulation. Using voucher auctions,
Gazprom’s management privatized 40% of the company for the price of $100 million dollars, selling a significant portion of Russia’s natural resource wealth back to its own managers for a fraction of its value. At its peak market capitalization in 2008, Gazprom was worth $369 billion.
Under Chernomyrdin, Gazprom’s CEO was Rem Vyakhirev. Together, Chernomydrin and Vaykhirev oversaw an orgy of corruption and asset stripping.
After Chernomydrin was relieved of his job as Prime Minister, a position he briefly held under Yeltsin, he and Vaykhirev transferred their assets over to their children. Gazprom awarded a $1 billion contract to Stroitransgaz, a pipeline construction company over 50% owned by Gazprom managers and relatives, including Vyakhirev’s daughter.
During this time a number of corrupt intermediary companies were established, including a commodities trading company called ITERA.
ITERA was set up by Igor Makarov, a citizen of Turkmenistan and friend of the country’s then President-for-Life Saparmurat Niyazov. Following independence, Turkmenistan sought to sell its natural gas abroad for desperately needed cash. However, as the regional pipeline infrastructure had been built during the days of the Soviet Union, Makarov needed to negotiate with Gazprom to arrange for the transportation of Turkmen natural gas out of the country.
While Gazprom wasn’t interested in allowing Turkmen natural gas to compete with its domestic market, it did allow it to be sold to Ukraine. The gas started pumping in 1994, earning Makarov a handsome profit.
In addition to Makarov, the board of ITERA largely consisted of Gazprom officials and their relatives. ITERA itself was, curiously, incorporated in Jacksonville, Florida. Corrupt Gazprom executives used ITERA to strip assets from their own company at outrageously reduced prices.
Gazprom sold ITERA a 32% stake in Purgas, a gas-producing subsidiary for $1,200 when its market value was estimated at between $200 and $400 million.
Gazprom’s auditor, the American corporate consulting firm PricewaterhouseCoopers, explained this by the suggestion that the company was suffering from severe cash shortages. Around the time of the sale, however, Gazprom provided ITERA with $616 million in loans, credit guarantees and other services, making it the fourth-largest gas company in the world at the time.
Prior to Putin’s takeover of Gazprom, not everyone was willing to accept such bald corruption sitting down. A Gazprom investor named Boris Federov, a former Minister of Finance and director of the Russian Tax Office, attempted to persuade Gazprom board members to fire PwC and hire a new auditor to look into the relationship between ITERA and Gazprom.
Taking things a step further, Federov called for the removal of Vyakhirev as CEO. It was a bold and risky move on Federov’s part. He was subsequently threatened by the Russian mafia, his dog was poisoned and he was the target of a coordinated smear campaign in over fifty newspapers.
In May 2001, less than a year after he had removed Chernomydrin, Putin replaced Vyakhirev as Gazprom’s CEO with Alexei Miller. While Miller had no prior experience in the energy sector, he had worked under Vladimir Putin on the Committee for External Relations of the Saint Petersburg Mayor’s Office.
Over the years, Putin steadily replaced members of Gazprom’s board with his own personal friends and allies. The current chairman of the board, Viktor Zubkov, served under Putin in the St. Petersburg Mayor’s office. Board member Dmitri Patrushev is the son of Nikolai Patrushev, former head of the FSB at the time of Putin’s election and the apartment bombings and currently Secretary of the Russian Security Council.
“Gazprom has become Putin’s prime personal project,” Boris Nemtsov and Vladimir Milov wrote in a searing expose for Novaya Gazeta published in 2008. “He set a greedy eye on the corporation as soon as he came to power. In fact, during the 2000 presidential campaign, it became clear that energy resources and Gazprom were at the top of Putin’s agenda.”
Nemtsov, who had previously served as first vice-premier of the Russian government and minister for fuel and energy under Yeltsin, was a prominent democratic opposition politician. He was assassinated on February 27th, 2015, shot to death just outside the Kremlin.
There were initially high hopes that Putin would clean up Gazprom’s corrupt practices, but those were quickly dashed.
Though there was a brief pause in the asset stripping that was so flagrant under Chernomydrin and Vyakhirev, by Putin’s second term it continued apace with the sale of a Gazprom-owned subsidiary Sibur below market price to an off-shore company based out of Cyprus.
Putin’s seizure of Gazprom led not to a change in corrupt activities but in a change to the beneficiaries. Gazprom’s insurance subsidiary SOGAZ was sold for $120 million, ten times below market price, to a consortium of buyers that included Bank Rossiya, the bank associated with the Ozero Cooperative that has been described by the U.S. Treasury Department as, “the personal bank for senior officials of the Russian Federation.”
The consortium then went on to sell 51% of SOGAZ to a company called Abros, a fully owned subsidiary of Bank Rossiya.
An additional 12% was sold to Accept Ltd, a company owned by Mikhail Shelomov, Putin’s first cousin once removed. State owned companies have been placed under pressure to get their insurance from SOGAZ.
Gazprom also continued to use shadowy intermediary companies. Under Alexei Miller’s leadership, the company repossessed much of what it had sold to ITERA.
The sale of Turkmen gas to Ukraine was then awarded to another mysterious intermediary named Eural Trans Gas, owned by a Ukrainian former fireman and soldier named Dmytro Firtash, who has been described by the United States Department as, “an upper-echelon [associate] of Russian organized crime.”
Euro Trans Gas was replaced by another intermediary named RosUkrEnergo, 50% of which was owned by Gazprom’s Austrian subsidiary Arosgas Holding, and 50% owned by Dymtro Firtash and his junior partner Ivan Fursin. The strange names, constant turnover and opaque ownership of these companies are designed to confuse outside observers.
A Reuters special report from 2014 documented that, “Gazprom sold more than 20 billion cubic metres of gas well below market prices to Firtash over the past four years — about four times more than the Russian government has publicly acknowledged. The price Firtash paid was so low, Reuters calculates, that companies he controlled made more than $3 billion on the arrangement.”
The report further reveals that bankers with close links to Putin provided Firtash with $11 billion in lines of credit. Firtash grew to become one of the wealthiest oligarchs in Ukraine and became a major funder of Russian backed politicians across the country.
Read my examination of of Ukraine’s post-independence politics, seizure by organized crime, and the role of Firtash’s in the process, here.
Eural Trans Gas and RosUkrEnergo were alleged fronts for the infamous Eurasian organized crime leader Semyon Mogilevich. The US Department of Justice and FBI have both investigated the matter. Mogilevich was featured on the FBI 10 Most Wanted List from 2009–2015. He was removed because he lived in Russia, which does not have an extradition treaty with the United States.
Oleksandr Turchynov, then the head of the Ukrainian Security Service, told Global Witness in 2006 that they were also investigating Mogilevich’s involvement.
Firtash and Mogilevich shared the same Israeli attorney Ze’ev Gordon, who served as a trustee when Firtash established Eural Trans Gas on December 4th, 2002.
A day later the company was awarded the Turkmenistan-Ukraine gas business from Gazprom.
Firtash only acknowledged his ownership stake in Eural Trans Gas and its successor RosUkrEnergo in 2006 after it was discovered that the FBI was investigating a company called Highrock Holding.
Firtash was a principal owner of Highrock Holding, its financial director was a man named Igor Fisherman.
Fisherman had been indicted alongside Mogilevich by U.S. authorities for his role a RICO conspiracy involving a wide variety of criminal violations.
In a classified U.S. diplomatic cable released by Wikileaks, the acting economic counselor to the U.S. Embassy in Kiev William Klein stated that 34% of Highrock was owned by Agatheas Trading Ltd, whose director was Mogilevich’s wife Galina Telesh.
Firtash has insisted that Igor Makarov, the head of ITERA, was a partner in Highrock, though Makarov has denied this.
Both Firtash and his minority partner in RosUkrEnergo were described in a 2005 report from the Austrian Federal Criminal Investigation Agency as senior members of the Semyon Mogilevich organization.
Firtash’s involvement in RosUkrEnergo had been concealed by Raiffeisen Investment AG, the investment arm of Raiffeisen Bank of Austria.
In another leaked State Department cable, career diplomat Scott F. Kliner stated: “U.S.-indicted crime boss Semyon Mogilevich probably uses RZB [Raiffeisen Zentralbank] and its subsidiary Raiffeisen Investment Holding AG (RIAG) as a front to provide legitimacy to the gas company that we suspect he controls, RosUkrEnergo (RUE). RUE makes direct payments of $360,000 annually to each of two RIAG executives in “consulting fees.” We assess that the payments probably are bribes for RIAG to maintain the front for Mogilevich.”
In a meeting with the American Ambassador to Ukraine William Taylor on December 8th, 2008, Firtash did not deny knowing Mogilevich.
Taylor wrote in yet another leaked State Department cable that Firtash had acknowledged his ties to Semyon Mogilevich, explaining that he needed his permission to get into the natural gas business in the first place.
Firtash told Taylor that after he had been awarded Gazprom contract over ITERA, Igor Makarov summoned him to a dinner that included his head of security, who was a former member of the KGB, Semyon Mogilevich and Sergei Mikhailov, a member of the Solntsevskaya Bratva.
Firtash explained that Makarov had told him that he would get his gas business back as easily as he had taken it away. Firtash credited leaving the meeting alive because of his “good reputation among central asian leaders.”
Putin’s experience as Deputy Mayor in St. Petersburg shows that he was comfortable working with organized criminals and this did not change when he became the President of the Russian Federation.
Indeed, Putin’s utilization of organized crime to further his goals has extended well beyond Russia’s borders.
A report released by former US Director of National Intelligence Dennis Blair states that there is an “apparent growing nexus in Russian and Eurasian states among government, organized crime, intelligence services, and big business figures.”
“[I]nternational organized criminals control significant positions in the global energy and strategic materials markets,” former Attorney General Michael Mukasey warned in a speech before the Center for Strategic and International Studies.
“So-called ‘iron triangles’ of corrupt business leaders, corrupt government officials, and organized criminals exert substantial influence over the economies of many countries… One of the most well-known recent examples is the case of Semyon Mogilevich [who]… is said to exert influence over large portions of the natural gas industry in parts of what used to be the Soviet Union.”
Putin’s personal relationship with Mogilevich was addressed in a discussion between former Ukrainian President Leonid Kuchma and the then head of the Ukrainian Security Service Leonid Derkach.
The conversation was part of hundreds of hours of recorded discussions leaked by a member of Kuchma’s security detail.
Transcripts of this recording were circulated within the US Government as revealed by Wikileaks, thus improving the likelihood of it’s veracity.[2]
KUCHMA: “Have you found Mogilevich?”
DERKACH: “I found him.”
KUCHMA: “So, are you two working now?
DERKACH: “We’re working. We have another meeting tomorrow. He arrives incognito.
Later in the discussion Derkach revealed a few details about Mogilevich.
DERKACH: He’s on good terms with Putin. He and Putin have been in contact since Putin was still in Leningrad.
Putin and the Russian Petroleum Industry
In addition to exerting control over Russia’s natural gas industry, Putin has also reinstated significant state control over its Petroleum industry.
Unlike the Soviet natural gas bureaucracy, which was kept largely intact and under significant state control as Gazprom, the Soviet Ministry of Petroleum industry was broken into a dozen or so roughly private entities. The Soviet Minister of the Petroleum industry Vagit Alekperov first created a joint-stock company Rosneftgaz (Russian Oil and Gas).
As privatization proceeded apace, Alekperov personally took over several oil producing fields and named his company Lukoil.
Other private companies that were formed from the carcass of the old Soviet ministry included the vertically-integrated oil companies Yukos, Sibneft, TNK and Surgutneftegaz.
These companies were seized by powerful oligarchs during the Yeltsin Administration for pennies on the dollar. The remaining state owned oil were consolidated under the name Rosneft.
Putin placed Rosneft under the control of one of his closest aides, Igor Sechin. Fluent in Portugeuse, French and Spanish, Sechin spent much of the Cold War in Mozambique and Angola, where it is believed he was an agent of the GRU, Russian military intelligence.
Sechin worked in the St. Petersburg’s mayor’s office from 1991–1996, becoming Putin’s chief-of-staff in 1994.
Upon Putin’s assumption of the Presidency, he and Sechin aggressively pursued a strategy of re-nationalizing Russian’s petroleum industry.
The most notorious instance of this was the seizure of Yukos, owned by Mikhail Khordorkovsky who was then the wealthiest man in Russia.
A former member of a Communist youth organization, Khordorkovsky had emerged out of the late-Soviet period of perestroika and the Yeltsin years as one of Russia’s most cunning oligarchs.
During the loans-for-shares period of privatization in 1996, Khodorkovsky used his Bank Menatap to purchase the oil company Yukos for $309 million, it would shortly thereafter have a market value of $15 billion.
Putin not only desired to seize control of his oil empire, but feared the young and charismatic Khordorkovsky as a potential political rival.
Despite his murky ascendence as a tycoon from the corrupt privatizations of the 1990s, by the early 2000s Khodorkovsky had emerged as an outspoken advocate of transparency and corporate governance reform.
He founded the foundation Otkrytaya Rossiya, Open Russia, and proceeded to promote internet connectivity in the provinces, independent journalism and a new boarding school for disadvantaged children.
Khodorkovsky also provided funding for between 50–80% of all the non-governmental organizations in Russia.
By the early 2000s Khordorkovsky was growing aware a brewing conflict that pitted him against the security services officials ensconced around Putin in the Kremlin and Igor Sechin in particular.
“Sechin’s followers had their own agenda, while we wanted to move toward a more transparent economy,” Khodorkovsky said in an interview. “Everyone sensed that very soon Putin would have to make a choice: the siloviki or the liberals.”
Khodorkovsky’s confrontation with the siloviki spilled out into the public on February 19th, 2003, during a meeting of the Russian Union of Industrialists and Entrepreneurs (RUIE).
During the meeting, Khodorkovsky delivered remarks criticizing Rosneft for its purchase of the Northern Oil company for $600 million, over three times its market value.
Putin was personally present at the meeting. Khodorkovsky read from a PowerPoint presentation entitled, “Corruption in Russia: A Brake on Economic Growth.”
Khodorkovsky used the speech to denounce the practice of accepting bribes among Russian courts and civil servants. By all accounts, Putin took the criticism personally.
“And where did he get this Yukos, eh?” Putin asked a banker in attendance. “After everything they’ve had a hand in, he accuses me of taking bribes? He’s got some nerve, preaching to me in front of everyone.”
“Your bureaucracy is made up of bribe-takers and thieves,” Khodorkovsky said to Putin.
Putin erupted, castigating Yukos for having “excessive reserves.”
The confrontation between Putin and Khordorkovsky was public as the meeting was televised live. During his animated defense of Rosneft, Putin displayed detailed knowledge of the Northern Oil acquisition that many in attendance found surprising.
Khodorkovsky later came to believe that Putin had been intimately involved in Rosneft’s purchase of Northern Oil, and that by criticizing the deal he had unintentionally crossed swords with Putin himself.
The fact that Khordorkovsky was politically connected, the wealthiest man in Russia and in possession of Russia’s largest oil producer in Yukos gave him the confidence to avoid taking the advice of confidants who suggested he flee the country as Gusinsky and Berezovsky.
His confidence was misplaced.
Two key factors played into Putin’s decision to remove Khodorkovsky from the scene.
First, Yukos had signed a protocol of understanding with the American oil company Exxon-Mobil to become partners in what would have been the largest oil company in the world.
Second, Khodorkovsky was involving himself in politics, a cardinal sin from Putin’s perspective.
Khodorkovsky along with some other Yukos executives had begun to finance Russian political opposition parties. He also used his wealth to create a bloc of support among up to 100 members of the Duma.
There was even discussions that Khodorkovsky might run for President in 2008, when the Russian constitution mandated that Putin step down after his second term.
On October 25th, 2003, Khodorkovsky’s private jet landed in Novosibirsk to refuel. The plane was raided by masked gunman carrying submachine guns and Khodorkovsky was arrested.
Over the next few months over two dozen Yukos executives and members of its legal team were arrested as well. Starting in mid-2004, Khodorkovsky’s trial lasted ten months. It ended with his conviction and he was sentenced to nine years in prison.
Yukos itself was accused of failing to pay $33 billion in back taxes. Between 2004 and 2005, nearly all of the formerly private company’s assets were expropriated by Rosneft.
Rosneft grew further in size and influence when the oligarch Roman Abramowich sold his 72% stake in Sibneft, giving the state oil company control of 30% of Russian production.
These coercive acquisitions took place during a time of rapidly rising oil prices, which was a general trend during Putin’s first two terms in office.
With national coffers swelling, Putin set about with increased confidence using his cash to spread corruption and political influence abroad. Nowhere was this more pronounced than in Ukraine.
Western democracies also proved not to be immune to a wave of oil and gas money pouring forth from Russia.
The next installment in the series will cover how Putin’s Kremlin spread corruption abroad to advance its police aims.