by Craig Unger
The most telling clue to Putin’s real views came in an essay he wrote as he was about to take office. “Russia has been and will continue to be a great country,” he wrote, “. . . [but it] is never going to be another USA or England, where liberal values have deep historical traditions,” because Russians are more attracted to “collective forms of life.”5
Perhaps the most revelatory moment in his essay was his use of a somewhat archaic term that had an imperial ring to it: derzhavnost, a word dating back to tsarist times that indicates belief in the greatness of the state. The word is derived from derzhava, the orb that was part of the tsarist regalia, which signified Russia’s imperial reach.6
At a time when the once-formidable Eastern Bloc was vanishing before his eyes, was Putin truly serious about resurrecting Russia’s imperial past? Hungary, the Czech Republic, Poland, and East Germany (which had reunited with West Germany) had already joined NATO. Estonia, Latvia, Lithuania, Slovenia, Bulgaria, and Romania were next in line, ready to go.
If Putin were to reverse the course of history, where would he possibly begin?
The unspoken answer, now that both the Soviet Union and communism were dead, lay in the fact that the Russian security forces and the Mafia had rushed in to fill the power vacuum. Under the new, emerging Putin paradigm, the Kremlin operated hand in glove with the Bratva, to the benefit of both, with the Mafia adhering to guidelines established at the top.
For Mogilevich, having Putin as an ally meant he was now in a position to make a major move. Instead of arbitrating turf battles in Brighton Beach or Budapest, he was now poised to begin rearranging multibillion-dollar pieces on the geopolitical chessboard. The upshot of the 1995 Mafia summit meeting in Tel Aviv had been that Mogilevich would be allowed to make a move on the Ukraine energy trade. Implementing that agreement, however, required cooperation from the powers that be in both Moscow and Kiev. Everything was possible so long as Mogilevich played by Putin’s rules—namely, that Putin now provided krysha (protection) for Mogilevich, just as Mogilevich did for his underlings. “Nobody would survive in Moscow without the roof of the FSB,” said a highly knowledgeable Mafia source.7
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Meanwhile, Mogilevich’s plans for globalization continued apace. Having set up an industrial magnet firm in Budapest called YBM Magnex, he expanded into Canada and the United States, and dispatched Dr. Jacob (Yakov) Bogatin, a trained metallurgist who happened to be David Bogatin’s brother, to its Newtown, Pennsylvania, branch to become CEO.8
But on May 13, 1998, the FBI raided YBM’s Newtown offices and found its huge site littered with thousands of pages documenting sales, purchase orders, invoices, and the like. However, they did not find any actual magnets.9 Instead, they discovered that Mogilevich had been using some extraordinarily creative accounting—and hyperbolic PR about a nonexistent product—to send YBM’s stock price skyrocketing from less than ten cents a share to $20.15.10
After the raid, trading of YBM shares on the Toronto Stock Exchange was halted. In December 1998, YBM went into receivership.11 By then, however, according to the Toronto Globe and Mail, Mogilevich had personally made $18.4 million from stock sales and other compensation, while partner Jacob Bogatin had made $10 million,12 all from a company that, according to the FBI, did not actually make magnets and “was created for the sole purpose of committing securities fraud.”13 In 2003, Mogilevich, Jacob Bogatin, and Igor Fisherman, YBM’s European operating manager, were indicted on forty-five felony counts for the $150 million stock fraud. But because there is no extradition treaty between the United States and Russia, they were never brought to trial in the United States.
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In the course of its investigation, the FBI took the unusual step of starting the FBI–Hungarian National Police Organized Crime Task Force in Budapest to dismantle organized crime groups in the very city that Mogilevich had chosen as his base.14 As soon as the task force began investigating, Mogilevich realized that if he stayed in Budapest, he risked extradition because Hungary did have such a treaty with the United States. So in June 1999,15 he fled to Moscow, where he was safe.
In a rare newspaper interview a few months later at the Moscow Marriott, with Sandra Rubin of Canada’s National Post, Mogilevich made no secret of the contempt he had for the United States as a result of the FBI’s investigation, refusing even to take a sip from a sealed bottle of mineral water, lest it be poisoned. “This is an American hotel,” his translator explained. “He does not eat or drink in the house of the enemy.”
The problems all went back, Mogilevich said, “to some low-life FBI agent who pretended he was an expert on Russian matters and made up a file of people who were supposedly ‘known’ to Russian authorities. It was just made up.”16
Since the FBI started investigating him, he said, “I wouldn’t say my life has changed—it has disappeared. My son comes home from school with bruises all over his body. He has been fighting with everyone who calls him the son of a killer, the son of that guy involved in drugs.”
With that, Mogilevich’s eyes filled with tears. He looked down at his ashtray. “I used to smoke True because it expressed what was inside me,” he said, as he chain-smoked Davidoffs. “But I switched brands because I found out there is no such thing as ‘true’ in America.”17
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Meanwhile, in Budapest, American officials had put together a very different picture of Mogilevich, and were dumbfounded by the fealty of the Ukrainian secret service (SBU) to him. Even though the Ukrainians knew the FBI was hot on his trail, SBU director Leonid Derkach rhapsodized about Mogilevich as a great entrepreneur to a reporter, asserting that he had created “a scientifically unique mini-magnet that would revolutionize industry and transport.”18
Of course, that was nonsense. The so-called mini-magnets didn’t even exist. It was another magnificent scam. Mogilevich and his associates had just cheated investors out of $150 million.19
In response to Derkach’s homage to Mogilevich, US ambassador to Ukraine Steven Pifer, accompanied by an FBI agent, met with Ukraine’s secretary of state for security and defense, Yevhen Marchuk, and gave him the FBI file on Mogilevich, who had made it to the FBI’s vaunted “Ten Most Wanted” list.
But that changed nothing. In February 2000, Derkach met secretly with Mogilevich in Kiev to finalize a business deal whereby Mogilevich would sell the Ukrainian SBU an electronic intelligence-gathering system.20 Mogilevich had become so close to Derkach and Ukrainian intelligence that he was actually the vendor for the SBU when it came to sensitive intel gathering. And even there, Mogilevich was able to make out like a bandit. The SBU paid Mogilevich almost $4 million for a system that cost just over $2 million in America.
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Strategic relationships like these were vital to Mogilevich if he was to insinuate himself into the lucrative Ukraine energy trade, a subject, no doubt, that seems extraordinarily arcane and dreary—until one realizes that it is a great way to siphon off huge sums of money. A key figure in helping make that happen was Dmitry Firtash, an up-and-coming Ukrainian oligarch who had been bartering consumer goods in Ukraine, Turkmenistan, and Russia in the nineties when he won permission from then–Ukrainian president Leonid Kravchuk to buy gas for the Ukrainian market.21
The deal was worth billions, thanks to Ukraine’s historic role as a transit point for Western European gas imports from Russia and Turkmenistan and as a major consumer of gas in its own right. Poland, Germany, and other European countries also relied heavily on Turkmen gas, which Ukraine bought through the barter of food, chemicals, and machinery, rather than cash. Then Ukraine sold the extra gas for hard currency.22
Given Ukraine’s high rate of inflation, there was a certain logic to doing business that way, but there was one drawback: Barter as a form of trade is highly susceptible to tax evasion and corruption.
Enter Semion Mogilevich.
Putin’s reputed
alliance with Mogilevich now effectively enabled the Russian Mafia to participate in multibillion-dollar trade deals that appeared, on the surface, to be entirely legitimate. Among those deals, the most significant involved establishing “opaque intermediary companies,” whose ownership and roles were often unclear, to be key players in the lucrative Ukraine energy trade. In principle, the scam was simple. Once the gas had been transferred by Moscow to Ukraine at low, low prices to Firtash, Mogilevich, and company, they could immediately resell it at market prices in Europe and pocket the difference, thereby siphoning off untold millions—perhaps billions.
As Mogilevich’s partner, Dmitry Firtash was emblematic of the new breed of oligarchs. Having grown up in a small village in western Ukraine, in his youth, Firtash worked as a tomato grower and trained to become a fireman. Then, after the Soviet Union collapsed, he began to sell canned goods, dry milk, and other foodstuffs to Central Asia through barter arrangements.23
At the time, Firtash said, he felt he was living “between two countries—one that had ended and one that was beginning” and was still “a country with no laws and no taxes.”24
His description was absurdly accurate. When he traveled to Turkmenistan trying to collect on a $3 million debt from a state-owned company, the cash-poor government offered to pay him in natural gas instead.25 Getting involved in the Ukraine gas business in the early days of cowboy capitalism was a high-risk, high-reward undertaking. One had only to look at the track record of Prime Minister Pavlo Lazarenko, who had embezzled $200 million during his thirteen months in office starting in 1996, and, according to Firtash, then ordered the assassinations of at least two prominent officials in Kiev who didn’t go along with his larcenous business practices.26
As Firtash later told an American official, there were dinners with mobsters—Mogilevich and Sergei Mikhailov from the Solntsevo Bratva, among others—at which he did not know “if he would be beaten up or even killed.”27
Then, in 2001, Firtash joined a Cyprus-based company called High Rock Holdings LLC that became a key part of his relationship with Mogilevich. According to a classified “Secret” cable by the US ambassador to Ukraine, William Taylor, which was published by WikiLeaks, Firtash acknowledged but downplayed his ties to Mogilevich, “stating he needed Mogilevich’s approval to get into business in the first place. He was adamant that he had not committed a single crime when building his business empire, and argued that outsiders still failed to understand the period of lawlessness that reigned in Ukraine after the collapse of the Soviet Union. . . .28
“He noted that it was impossible to approach a government official for any reason without also meeting with an organized crime member at the same time. Firtash acknowledged that he needed, and received, permission from Mogilievich [sic] when he established various businesses, but he denied any close relationship to him. . . . If he needed a permit from the government, for example, he would invariably need permission from the appropriate ‘businessman’ who worked with the government official who issued that particular permit. He also claimed that although he knows several businessmen who are linked to organized crime, including members of the Solntsevo Brotherhood, he was not implicated in their alleged illegal dealings.”29
Firtash denies having made the remarks to the ambassador. But files from the FBI, Interpol, and the US State Department assert that Firtash’s ties to Mogilevich were very real indeed. His most important link to Mogilevich came through a Cyprus-based company he joined in 2001 called High Rock Holdings LLC. High Rock’s financial director, Igor Fisherman, had served as a high-level aide to Pavlo Lazarenko, the murderous Ukrainian prime minister, but was better known as Mogilevich’s right hand,30 and had also been a principal at YBM Magnex31 in Newtown, Pennsylvania, as part of Mogilevich’s pump-and-dump stock scam.* As a result of such connections, the Department of Justice has identified Firtash as an “upper-echelon [associate] of Russian organized crime.”32
And those weren’t Firtash’s only alleged ties to Mogilevich. According to the US ambassador to Ukraine’s cable, “34 percent of High Rock was owned by a firm called Agatheas Trading Ltd,” which Galina Telesh, Mogilevich’s ex-wife, reportedly directed from 2001 to 2003.33 Thanks to all of this, a reporter from the Financial Times concluded, Firtash had become “the new face of the Mogilevich group.”34
And so began a series of opaque intermediaries, corporations that siphoned off billions of dollars from the Ukrainian energy trade. By 2002, a new intermediary called Eural Trans Gas (ETG) had been founded in Hungary by Israeli attorney Ze’ev Gordon,35 to transport gas from Turkmenistan through Russia to Ukraine. As an investigation by Reuters concluded, its ownership structure was “unclear,”36 but Gordon happened to be Mogilevich’s longtime attorney and Firtash seems to have played a major role in the company. Moreover, the day after the tiny company was founded—its startup capital was a mere $12,000—it got a massive contract to transport gas from Turkmenistan to Ukraine that was worth as much as $1 billion on the European markets.37
According to “It’s a Gas,” an investigation into the Turkmen-Ukraine gas trade by Global Witness, an NGO, the ownership papers for ETG listed three hard-up Romanians with no connection to the gas industry, one of whom was an out-of-work actress who says she allowed her name to be used in order to pay her phone bill. The following year, ETG cleared $760 million in profits.
In 2004, RosUkrEnergo (RUE) replaced Eural Trans Gas and became the go-between for gas deals between Turkmenistan and Ukraine. Once again, the ownership was hazy initially, but in the end it became clear that Firtash and Gazprom, the giant Russian gas company, owned nearly the entire company.38
Through all these deals, Reuters concluded, Firtash’s “success was built on remarkable sweetheart deals brokered by associates of Russian leader Vladimir Putin, at immense cost to Russian taxpayers.”39
Indeed, the price Firtash paid for the gas was so low that companies he controlled made more than $3 billion on the arrangement, at the same time that bankers close to Putin gave Firtash up to $11 billion in credit, much of which went to back pro-Putin political factions in Ukraine.40
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Billions of dollars were pouring out through the Ukraine energy trade, but that wasn’t the only pipeline for flight capital coming out of Russia. In New York, one telltale sign that everything wasn’t kosher could be found in the dazzlingly unlikely rags-to-riches stories that abounded about Russian émigrés arriving penniless in New York and ending up enormously wealthy.
One of them was Tamir Sapir, né Temur Sepiashvili, an immigrant who came to America with the proverbial $3 in his pocket, started driving a cab, and a few years later had become a billionaire owning an apartment in, of all places, 721 Fifth Avenue, Trump Tower. His journey was not without intrigue.
After his taxi days were over, Sapir partnered with fellow immigrant Semyon “Sam” Kislin to open a small wholesale electronics store whose clients included Soviet diplomats, Politburo members, and KGB agents.41 Kislin had sold hundreds of TV sets to Donald Trump back in the seventies for his first major project, the transformation of the Commodore Hotel.
According to Newsday, the store was extraordinarily popular with the Soviets, so much so that Sapir somehow managed to parlay its success into getting licenses to ship Soviet oil to US refineries, a serendipity that led to great wealth.42
But a small electronics store is an unlikely path to massive fortune, and their real secret may have been their ties to organized crime through an Uzbek businessman named Mikhail Chernoy.* Like many oligarchs, Chernoy had gotten his start via immensely profitable and sometimes imaginative barter deals in which he traded iron ore pellets in exchange for Lada cars, coal for food and sugar, and the like. “Basically, I converted rubles to dollars by exporting coke and importing consumer goods,” he told the Observer (UK). “I approached Russian factories, which were operating only at 30 to 40 per cent capacity. They were on the point of collapse without the coke to run the furnaces
.”43
That wasn’t all. In the early nineties Chernoy and his brother Lev allegedly “defrauded the Russian Central Bank of more than $100 million through an elaborate scam involving dozens of fictitious companies,” according to a report by Pulitzer Prize–winning reporter Knut Royce for the Center for Public Integrity.44
The Chernoys then used the funds to seed their London-based holding company, Trans-World Group, through a convoluted maze of offshore companies, and “rapidly gained control of Russia’s aluminum industry and acquired a large stake in processing and distribution of other metals and petroleum products.”45
In the meantime, the Chernoys had begun working with Semyon Kislin’s firm, Trans Commodities, Inc., and were allegedly using it for fraud and embezzlement.46 The article also cited a 1994 FBI file that characterized Kislin as a “member/associate” of the mob organization headed by Vyacheslav Ivankov, the “godfather of Russian organized crime in the United States.” It also noted that Kislin had cosponsored a visa47 for Anton Malevsky,* 48 who was a contract killer who headed one of Russia’s most bloodthirsty Mafia families.
In the “Aluminum Wars” that followed, many businessmen who opposed the Chernoys ended up dead.49 But perhaps that’s not so surprising, given the players and the enormous stakes. In the end, Royce’s report said, “The brothers obtained licenses to buy the aluminum for $10 and sell it for $1,500 by bribing top Russian officials.” Just one of many ways that billions were made.
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In addition to overseeing the massive flow of flight capital that resulted from “privatization,” Putin had a deft touch when it came to consolidating his power. That became apparent when, just after becoming prime minister, Putin recruited two oligarchs who were among his closest confidants, Roman Abramovich and Lev Leviev,50 to undertake the highly unlikely mission of creating a new religious organization called the Federation of Jewish Communities of Russia. The idea was to bring together various Orthodox Jewish communities in Russia through an Orthodox Hasidic sect known as Chabad.
