‘Deception: Spies, Lies and How Russia Dupes The West’


The collapse of the Soviet Union brought the hope that Russia’s totalitarian police state— in which a knock on the door could mean a life sentence to the gulag—had been consigned to history. While communism quickly collapsed, elements of the KGB’s security state lingered, and entered into a malignant marriage of convenience with the oligarchs who reaped the benefits of the economic chaos of the 1990s. With the resurgence of authoritarianism and Soviet nostalgia under Vladimir Putin, the state security service resumed its central place in the Russian state, as well as the type of paranoid and illegal tactics which characterised the worst days of the Cold War.

In his new book, Deception: Spies, Lies and How Russia Dupes The West, Russia specialist and senior Economist editor Ed Lucas explores the consequences of this development in contemporary Russia. This has included the growth of a ruling cadre which resembles a crime family, and which includes many former KGB agents—most notoriously, Vladimir Putin himself. The paranoia and corruption embedded in this system has led to the rise of espionage as a weapon against the West—which Lucas argues has ignored to its peril.

By kind invitation of Dr Julian Lewis MP, The Henry Jackson Society is pleased to invite you to a meeting with Edward Lucas, an author and journalist with over twenty years of expertise in Russian issues, including Russian-Western relations, security and energy issues. He is the author of the international best-seller The New Cold War: Putin’s Russia and the Threat to the West, and is the International Editor of The Economist.


Dr Julian Lewis MP: Ladies and Gentleman, before I introduce our speaker Edward Lucas I would like first of all to introduce Michael Weiss from the Henry Jackson Society, who is just going to speak very briefly about the society’s Russia program.

Michael Weiss: Thank-you very much. This is actually an inaugural event for the Henry Jackson Society, because it is the first event that we are hosting under the Russia studies program. On May 3rd we plan to release a report which we hope will be the most comprehensive look at the Russian opposition that has been forming both before the December protest movement and afterwards, written by my colleague and co-chair of this centre Julia Pettengill, who is sat next to me. So just a brief word about that, thank you very much.

Dr Julian Lewis MP: Thank-you very much indeed. I assure you that it is a complete coincidence that there is a Mrs Chapman speaking at the moment on the floor of the house, given the subject we are about to hear today from Edward Lucus.

[Laughter from audience]

Edward is, as you all know, the Central and Eastern Europe Correspondent for The Economist and the editor of its international section. He has covered Russia and Central Eastern Europe for more than twenty years as a journalist. He offers uniquely valuable insights into the political and economic climate of the former Communist countries and how current trends will affect the west. Now of his first book, the bestseller The New Cold War: Putin’s Russia and the Threat to the West— according to Amazon, The Sunday Times described it as “…an impressive polemic arguing that the West still underestimates the danger that Putin’s Russia poses.” According to the Guardian, however, “if you need a convincing argument for a joined up EU foreign policy, look no further.” So I suspect that says rather more about the newspapers then it does about the book. However, his newest book, Deception: Spies, Lies and How Russia Dupes the West, about which we are going to hear this evening, has been quite favourably reviewed by something called russiaprofile.org, which I gather is an emanation of the Navosti press agency, and they seem to be uncertain as to whether or not Edward in talking about the situation as it is today, or if he is actually hankering after the old certainties of the Cold War, or wishing Russia would come further out of it so that he would not have to write such alarmist books. Now one of the biographies I saw of Edward said that he speaks five languages; German, Russia, Polish, Czech and Lithuanian. I was rather hoping that he would speak English tonight, but I am sure that he will do the best that he can. Over to you.

Edward Lucas: Thank you very much. We have an exciting technical process going on so we are going to start the power point presentation in the middle of the talk. This is going to be exciting for me and possibly exciting for you too. It is actually not actually the technical people’s fault but Michael Gove’s fault, because his meeting overran, which meant that we did not have a chance to get this set up. So you are missing the first slide which is an accurate biography of me, but Julian did such a good one that we do not need to worry about that. You are also missing the cover of the book. I should say that because we are in the House of Commons we are not actually selling the book yet, because that would be against the rules of the House of Commons. I am giving it away to people that I like. And I have an assistant here who is taking donations. The recommended donation is fifteen pounds. If you give more that would be very nice. If you give less you will get a beady look from my assistant and I am sure that you do not want that. If we could start the slide show.

This book is in a way a sequel to The New Cold War. The New Cold War had a rather alarmist title, but a very serious message, which was “watch out, Putin’s about.” It also highlighted the sort of things that were happening inside Russia that I was worried about. The things Russia was doing to its neighbours and their inability to respond. Perhaps one of the central messages of the book was there is going to be a war in Georgia, and that happened. So, from that point of view it was sad to be right. I think that the return of Mr Putin in what was incorrectly called an election has also underlined the point. I say that it was inadvisably called an election because to me an election involves a degree of choice and unpredictability that was noticeably absent from what one might call the “electoral event” in Russia.

The accent of The New Cold War, my last book, was chiefly about energy policy, that was its core, for the EU to take energy policy seriously. This one is about the slightly sexier topic of espionage, and it looks at why Russia is good at spying, why we should mind that Russia is good at spying and why we tend not to be very good at spying, and I highlight some fairly spectacular blunders that the West has made in past years.

Hands up to those who know who Sergey Magnitsky was? To me, Sergey Magnitsky is why we should mind about this regime in Russia. Sergey Magnitsky was a lawyer, and he was the sort of person you might have met here in London or on holiday or in New York, and you would have that that this is the sort of person to make one really optimistic about Russia. He was a really well-educated polyglot; impressive, honest, loyal. He really believed in his country. He believed in the rule of law. And he uncovered a fraud, a $230,000,000 fraud, which was a very interesting fraud. It was a fraud perpetrated against the people of Russia; against the Russian taxpayers by their own officials. I go into this in some detail in the book.

It starts off with a British investor whose properties were looted from under his nose in Russia. But in a way that is not really the point. I have never really got worked up about British investors and foreign investors who get into difficulties in Russia because I think that if you go to somewhere like Russia, you may make a lot of money, you may lose all your money, but please do not come whinging to the Western media afterwards. It’s that sort of country. So I do not have a huge amount of sympathy for BP when they get into trouble in Russia. I did not have a huge amount of sympathy for this guy Bill Browder, when he got into trouble in Russia. But I do have a lot of sympathy for Sergey Magnitsky, because he uncovered this fraud and he started complaining about it. This was a fraud involving the biggest tax refund in Russian history, $230,000,000 paid out in one day. I used to run the Moscow office of The Economist and we overpaid a small amount of tax, a tiny amount by accident, a trivial amount. I was there for four years. And for four years we had not been able to get the tax back. So to get the Russian tax authorities to give back the $230,000,000 in one day is a pretty spectacular achievement. And what Magnitsky uncovered was that this was a fraud perpetrated by senior people in the tax authorities, in collusion with people in the interior ministry and in collusion with people in the FSB.

The FSB is the main successor organisation to the old KGB. It is not much of an exaggeration to say that the FSB basically runs Russia. So this would be as if M15, in conjunction with the Metropolitan Police and the Home Office, cooked up a fraud with the HRMC to defraud the British taxpayer of £230,000,000. Now Magnitsky uncovered this payment and filed numerous criminal complaints. And you would think that in any normal country that this would resonate in the media, that there would be questions asked in the parliament, NGOs would get involved and a stink would be kicked up all over the place and something would happen. Well, this is not what happened with Mr Magnitsky. He was arrested; a classic arrest in front of his wife and children. He never saw his children again. He was in jail for almost a year and kept in absolutely abominable conditions. Every complaint that he made was rejected, including his request for urgent medical attention. He developed a very painful complaint called pancreatitis, and then in the hours towards his death he was beaten very savagely by eight riot police with truncheons. Nobody has been punished for his death. Nobody has investigated it properly. The assurances given by President Medvedev that this would be investigated have proved to be completely empty, and the perpetrators of this fraud have sat on their money and indeed laundered it in the West.

Now you may say that is very sad, why should we worry about that, sad things like that happen all over the place? The case of Magnitsky epitomises the way in which the regime in Russia loots Russia and murders people who get in their way. Magnitsky should be a hero. He was a classic whistleblower. Whistleblowers often get into trouble all over the place. But what was really unusual about Magnitsky was the size of the whistle he blew, the crime that was being committed by the FSB, the old KGB, and the dreadful fate he experienced.

Now you might think that is terribly sad, the FSB runs Russia, but why should we be mindful of that? Now this is the reason why I think that we should mind. Now you may say who is this guy, how very boring and how come I have never heard of him? The reason that you have never heard of him is because this lady is more interesting.

[Power Point presentation displays photo of Anna Chapman]

I know that you are all dying for me to talk about Anna Chapman, but I am going to talk about Don Heathfield first. Don Heathfield was one of the most successful Russian spies of the post-war era. His real name was Andrei Bezrukov. But he lived in Boston and he was a really successful international management consultant. He actually wrote a chapter in a book called Scenarios for Success. He is probably the only spy in history to have written part of an academic text book as part of his cover story. And he was able to charge big international companies thousands of Euros for his consulting services. And he specialised in what is called “Future Studies,” which means that he would go to the very top people in organisations and ask them to tell him what they are really worried about, and he would try to help them with the decision making process to deal with it. He had really excellent access all over the world in big companies in Europe, big companies in America, and interestingly, big companies in China. He also produced some software, some decision-making software. It was really an elaborate kind of calendar with bells and whistles. But you could install this and he sold it to governments and to big companies. You could install this on your laptop or on your computer and it would help you make decisions. Now this would just be fine if you were to imagine that he was a management consultant. If you had known that he was an undercover agent for the Russian foreign intelligence service, you might think twice about him installing software on your computer.

Now he was what we call an “old style illegal.” He had stolen the identity of a dead Canadian baby who had died in infancy. His wife, Anne Foley, had also stolen the identity of another Canadian. And he had quite legitimately gone to a Canadian university under this is identity. He had acquired a Canadian passport with his birth certificate. He had gone to the Kennedy School at Harvard and a posh management school in France, and he had a really excellent career in the West. It would have been very hard in the old days to crack that cover story. It was the kind of tactic that the Soviet Union used extensively in the West, to steal an identity. Has anyone read “Day of the Jackal”? Remember in “Day of the Jackal,” how he gets his false British passport? Go to a country churchyard, find the tombstone of a dead baby, get the birth certificate, and with that you apply for a passport and get an illegal identity.

But there was a big hole in Don Heathfield’s plan, a big hole in this whole apparatus of illegals, which is that we no longer live in hermetically-sealed worlds. I tracked down someone who had been to university with Don Heathfield. Not university in Canada, not the Kennedy School of Government, but a university in Tomsk in 1981, because that’s where Andrei and his wife Yelena went to university. This friend of mine actually lived in the United States and is a frequent visitor to Harvard, and she could have any time, crossing Harvard Yard or just walking around the street in Boston, she could have bumped into him and she would have said “Hi Andrei, nice to see you again,” and he would have said “Actually I’m Donald Heathfield,” and there would have been, to put it mildly, some explaining to do. And that’s the vulnerability of this old-style illegalling. It only works in the hermetically-sealed world, and also where documents exist only on paper, and already now we have integrated birth registries and death registries. If you apply with a birth certificate for someone who’s died for a passport, more likely than not, you’re going to ring alarm bells. So Donald Heathfield I think was quite damaging, he was quite sinister. In a way he was a kind of intelligence dinosaur. There may still be some of them around, but I don’t think they make them like that anymore.

Anna Chapman was rather different, and she was different because she was exactly who she said she was. She was indeed born in the place she said she was born, she was educated in the place she said she was educated, and she was married to a rather hapless Brit called Alex Chapman, who I used to feel sorry for until he very gallantly sold topless pictures of her to The News of The World, then I felt less sympathetic to him. She had just the sort of career that many young people, young Russians, young Eastern European people, young people from all over the world have in London: she had a boring job at a bank, she worked in an executive jet company as an Executive Assistant, and then she moved off to America and tried to set up her own company. From the outside you would never have thought that she was anything to worry about. In fact, when she was busted in America with Donald Heathfield and the eight other Russian illegals, who were caught in the summer of last year, it didn’t look as if she’d done any serious spying. I’ve dug up quite a bit in the book, you can read about what made Donald Heathfield interesting. But the media focussed on the absolutely shocking fact that a young Russian woman had breasts and sex and boyfriends and didn’t really focus on what she’d been up to in Britain. One of the big investigative things in the book was that I started digging about what she’d been doing when she was here, and it was very interesting. I have to be very careful about what I talk about in public, because it would be easy to libel someone. But there is a company called Southern Union which was associated with a large Zimbabwean money transfer company, and her husband Alex was a Director of this company, and there was also a mysterious chap called Steven Sugden, and in the media coverage at the time this was all sort of rather passed over. She set up a company with her husband and there was another director called Steven Sugden who went to Dublin. So I started investigating. It turned out there was a real Steven Sugden who’s an absolutely honest electrician from Tunbridge Wells who’s never met Anna Chapman and didn’t know anything about Southern Union, and was very surprised when MI5 contacted him and grilled him on his connection with this Russian spy. He was particularly surprised and quite alarmed to find that his name, his date of birth, and his signature were all on the documents of this Southern Union company. He was even more annoyed to find out that, according to the company’s accounts at Companies House, that Southern Union had made a large director’s loan to him. This is where I start trying to attract people’s attention to say “this matters,” because this guy was not some big foreign investor in Russia who played dirty and ended up covered in mud, this is an absolutely ordinary British citizen. He had nothing to do with the world of espionage and with Russia, and his identity was stolen and nobody will help him. MI5 say their job is to catch spies, not criminals, and it’s a cold case as far as they’re concerned. I think it would be possible to do a bit of digging to find out how his identity was stolen and why it was stolen and what it was used for. But MI5’s just not that interested. They grilled him, he said he didn’t talk to anyone, and then they said “leave it to us,” and they did nothing. The police say that they can’t see that any crime has really been committed and were very distant, so they’re no help. Companies House say that it’s not their job to verify the identity of people who put documents in or particulars on the documents, they just record them, so they can’t do anything.

There’s another chap involved as well, an absolutely innocent guy in Dublin. The fake Steven Sugden, who I think is probably a Russian illegal using a mixture of intelligence tradecraft in pursuit of possibly organised crime ends, I can’t be certain, he won’t respond to my emails. But the fake Steven Sugden, possibly Zimbabwean, possibly Russian with a Zimbabwean passport, used an address in Dublin. Now I chased up this address in Dublin. I used the extremely advanced internet investigative tools of Google and Facebook until I found a Facebook friend of mine who lived in Dublin. I got him to go round to this house– being stingy and not wanting to spend the money myself– and knock on the door and ask “have you ever heard of Steven Sugden?” The answer was that they never had, so no connection with Steven Sugden at all at this house. It was also very interesting and rather sloppy tradecraft that in the documents at Companies House where he’d registered the company as being at this address in Dublin in Rossmore Grove, he’d spelt it wrong. It was an interesting bit of sloppiness, because it’s usually the one thing you get right, your own address, no matter how dyslexic you may be. Anyway, this is a cautionary tale about the way in which Russian espionage can suck up completely innocent people.

Now you may be saying, “well, ok, everybody spies on everybody else, don’t the Brits spy on Russia, and yes indeed we do.”

[Photograph of Paul Dukes projected on screen]

This is probably the single most successful British spy ever. He was a British illegal living in Petrograd during the Bolshevik Revolution, and he had the most brilliant cover. He played the piano in the canteen of the military high command, dressed as a tramp. He was actually a very good pianist before he became a spy. He was the only officer in the history of the SIS, MI6, to be knighted for his clandestine work undercover in the field. He did actually threaten to give the knighthood back when he got back to London because he’d borrowed a lot of money from the British merchants in Petrograd to fund his operations, because the forgeries that MI6 had sent him were so bad, they were printed with ink that ran when they got wet. There’s a marvellous description in his memoirs where he’s hiding in this tomb in a Saint Petersburg cemetery and a courier brings him this package of money which he needs more than anything else. He opens it and the rain drips on it and he sees the colours run. So he borrows money from the British merchants, as it were the British Chamber of Commerce in Petrograd, to run his operations. When he gets back to London and they’re eventually thrown out by the Bolsheviks, having lent this money to him at great risk to themselves, they turn up in London and say to MI6 “can we have the several hundred thousand roubles which we lent to Paul Dukes?”, at which point MI6 says “where’s your receipt?” At which point Paul Dukes says “unless you pay up I’m going to renounce my knighthood and say publicly why I did so.” Anyway that’s just a little historical aside.

But I’m afraid the disasters in MI6 don’t stop there. Now if we had the sound system, I’d be able to play you a really agonising clip of this guy talking. This is the real spy who got left in the cold. He was a member of Operation Jungle – is there anyone here who’s heard of Operation Jungle? Operation Jungle was the single most disastrous operation by MI6 behind the Iron Curtain. We sent in dozens of Estonians, Latvians and Lithuanians into the Baltic States in the 1940s and 1950s. The operation was completely blown, it was worse than useless. We ended up causing the deaths of hundreds and hundreds of people. This guy, [shows photograph on screen] trained in Britain, was one of the ones who got caught and went to the Gulag. When he was interviewed here for a documentary in 1989 he was still talking very bitterly about the way he was treated.

This guy [shows photograph of Herman Simm on screen] is another reason we should be worried. This is the most damaging spy in the history of NATO. Not the most damaging spy that NATO has deployed against other countries, the most damaging spy deployed against NATO. He was called Herman Simm and he was an Estonian. He was the top national security official in Estonia. He’d been a policeman in the Soviet era, rather a good policeman, ended up as police commissioner. In the independence era, he went from being police commissioner to being head of information at the defence ministry and then head of security there. We really liked Estonia, particularly we Britain, our MI6 really liked the Estonian secret service and did lots of joint operations with them, and our military liked the Estonian military and we supported them at every stage, and we really liked Herman Simm and we trained him. Hands up everyone who knows what Chickshands is. Ok, Chickshands is one of the most secretive places in Britain, which means that you can’t find it on Google Earth. It’s got a website and they do conducted tours there and they have a museum. It is the headquarters of Britain’s defence intelligence, and we do courses there for very carefully selected people from friendly countries. Herman Simm was one of them. I’m sure the Russians found that really interesting. Before that, we trained him to speak English at the Foreign Office language school in Beckensfield, which Gordon Brown later closed down.

Herman Simm was the classic example of someone from a really trusted post-communist country.  And he did all sorts of things. There was a NATO countries intelligence presentation where all the different NATO countries got together and did presentations on what they thought the Russians were up to in their countries, in the Netherlands. For convenience, all presentations bar one were put on a CD so that everyone who was there would know exactly what had been said, labelled “Top Secret–Do Not Share.” It was on Putin’s desk the next morning. I’m sure that he found it very interesting. But there was a kind of paradox there, because in a way NATO does not have any secrets. NATO secrets mean that the economist can’t find out about them. It does not mean that Russia cannot. An alliance between 27 people including all sorts of countries– I’m naming at random without any particular disapprobation– Greece, Bulgaria, Britain, whatever. Russians are pretty good at finding out what happens at NATO. NATO secrets are not particularly secret.  But what Simm was tasked with doing was. His case officer was another illegal, a Russian using a Brazilian birth certificate and Spanish passport. His case officer tasked him with finding out the secret NATO plans to attack Russia from Estonia, because from a Russian paranoid point of view the only reason why we would bring the former Baltic states into NATO is if we were going to attack Russia. And so there must be some secret NATO plan to attack Russia from Estonia. Simm was tasked with finding out the plan, the bases, the hardware, the objective and so on. And the more he looked the more he said– I have interviewed him, I am the only journalist to have interviewed him from prison and it is really quite pathetic, because he was being asked to find something that did not exist. He was being asked to find the unicorn. And he kept on saying “it isn’t there,” and they kept on saying “look harder.” And he was unable to convince them. What he did tell them that was quite interesting was that there was no NATO plan to defend Estonia. Far from using Estonia as a springboard for attacking the former Soviet Union, NATO was so keen not to step on Russia’s toes, not to offend Russia’s sensibilities, not to give the Russians the impression that they were being encircled, that when Estonia joined NATO in 2004, there was deliberately no contingency plan to defend Estonia, Latvia, Lithuania or any of the new members. And the threat assessment committee, the top secret MC161 NATO threat assessment committee, which has a Wikipedia entry, was explicitly told do not consider how there might be a threat from Russia. So in a way it was probably quite reassuring if Simm told the Russians that and they believed him. That would have been something quite useful for Russia to know.

I could drone on for another four hours, but there are a lot of people in the room who know an awful lot about Russia and they may want to ask questions. Maybe there are people here who have read the book and think that it is complete nonsense and they want to ask some questions. Maybe there are people who want me to elaborate on things that I have said. So I am going to stop now Mr Chairman. I am also going to thank the Henry Jackson Society; I rudely forgot to do so at the start, thank them for inviting me and thank Julian for hosting the event. And I am going to sit down and have a glass of water. Please, if you are thinking of saying that the book is brilliant please hold your breath, I much prefer to have hostile questions then friendly ones.

Dr Julian Lewis MP: Right, who is the brave person that will start it off? Yes, at the back there.

Question One: [Inaudible]

Edward Lucas: Sir, can I just ask if you have ever been to Russia?

Question One: Yes, I worked there for five years.

Edward Lucas: Ok, Russia is a real contrast. You have boom and bust. You have got nirvana and desolation right next to each other. And I have travelled all over Russia and there are incredibly impressive things there and incredibly depressing things. There are few things more depressing when going to a remote Russian village where the village is dying all around you; and I point out that Russia’s GDP is just one number, you have to have GDP per capita. I think that the real tragedy of the Putin’s years, of these twelve years, is that they have not diversified the economy. They have not modernised the administration’s system. They have not fixed the infrastructure. And they had 1.3 trillion dollars of excess on gas money. If you remember, the old price under Yeltsin was down in the depths, $12 a barrel at the end of the Yeltsin era. The Putin era has been north of $150. It’s enormous on gas. Putin had unlimited money and he had unlimited popularity. If he had said “you all have to wear orange trousers and blue hats to save the country,” they would have done it. Putin was an incredibly popular politician. And, at the end of 12 years, you still cannot drive from one end of Russia to the other. There are still no proper roads to drive from Moscow to Vladivostok. Where is the high speed rail? Where are the new hospitals, where are the new universities? There is still so much to be done. Skyscrapers all over Moscow, enormous capital flight out of Russia in the West; but still an economy that is based on natural resources and natural resources rent extraction. With so little investment, even the Germans– who placed a really big bet on Russian gas 10, 15 years ago– are horrified that it is so difficult to get new oil and gas fields on streams. Why are the pipes leaking? Why are the compressors so bad? There is so much that needs to be done in modernising Russia. And I really recommend that you read the pamphlet by Nemtsov and Milov which shows that the road network has shrunk under Putin. The road network is smaller than it used to be. It’s unbelievable that you have all that money coming in. You go to Moscow and other big cities to see fantastic, impressive offices and businesses, doing all sorts of things that Mangnitsky lived in. Then, on the one hand it does not spread; there is still this terrible public health, terrible infrastructure and so on. And secondly, there is this malevolent octopus with the FSB behind it all, stealing tens of billions of dollars belonging to the Russian people; killing anybody who gets in their way. Apart from that, Putin has done a great job.

Question Two: [Inaudible] …Democracy is on the decline there, culture in Russia does seem to be anti, at least non-democratic. With the security services able to carry on in view of the United States. Is it possible that the Russians do need an anti-democratic authoritative figure?

Edward Lucas: I am terribly sceptical of these historical determinist arguments. I remember people were saying that Poland was too chaotic to be prosperous. It is very easy to extrapolate backwards and say the country is like this because the people are like x. And I just don’t buy it. I think that democracy is a very loaded word in Russia because the experience of democracy in the 1990s was associated with such appalling economic and social dislocation, the humiliation of having Yeltsin as this drunken President. The people still have quite bitter memories of that, and certainly Putin trades on that.

Do Russians want dignity? Yes. Do they want truth? Yes. Do they want justice? Yes. And that is what is fuelling the opposition demonstrations now. You get Russians saying, “I have choice and excellence in my private life, I can choose where I go on holiday. If it is not good I demand my money back. I order things on the internet and they arrive. I choose where my children are going to be educated. As soon as I get my wallet out I can pretty much buy what I want. When I get my passport out I am humiliated. I am taken for granted by my politicians. We get these phoney elections. We get Putin two plus professional losers, a stooge and a clown. Then you say that it was a fair election because we counted the votes.” You just want to renew your driving licence. You can waste days at some stupid office with people trying to extract bribes from you. Every interaction with the state is loaded with humiliation and inefficiency. And people do not like it. I am a little bit sceptical. I think that the word democracy itself has bad connotations. But do Russians like their political system? No. Every opinion poll shows that they don’t.


Question Three: [Inaudible]…what should the West’s policy response be to the threat posed by Russia?

Ed Lucas: Well you are absolutely right. This is one of the really grotesque things that the City of London, particularly, in Austria and other places, where people launder the proceeds of crime. I think that if I turned up on the streets of London with a briefcase full of Faberge eggs and went into various jewellers shops, and I said that “these belong to some guy called Politovsky (36 minutes) and he probably acquired them illicitly, and we had an auction and they are mine now, and a mate in the government said that it is alright, it is legal in Russia, can I sell them?” I think that even now questions would be asked. When you turn up in London with a stolen oil company which is Rosneft, eight billion western shareholders money went south. This was stolen from the shareholders and given to Kremlin cronies. And when they turned up in London to be listed, the Americans said “no dice, you do not pass our smell test.” The Germans would not have them. And then the London Stock Exchange did a road show to Moscow to highlight what they called their flexible listing requirements, and everybody wanted a piece of the pie. It’s really grotesque.

There are Western banks that are in it up to here, including some British ones. Now they are desperately back-pedalling, because they know what they have got themselves into, and the FSA is coming down quite hard on them. I really recommend that you read the FSA’s report on the way in which British banks treat politically exposed persons. The incredible loopholes the FSA discovered. Banks taking on the offspring, they do not say Russians, but I can tell you that at least half the cases they do mention are Russians. The offspring from senior Russian politicians, a million pounds appear in the bank account and the chairman says that it is alright we didn’t do a due diligence check. It’s even worse in Austria. A company like Rosuganeria, it is a gas company with no gas pipelines, no gas fields, no gas storage. All it has is really good contacts book.

Question Three Follow Up Question: So what should the West’s policy be?

Edward Lucas: We should employ our money laundering laws. We should go after them the same way we would with Nigerians, or the Central African Republic or any of these other places. If the money is laundered and does not belong in the financial system. We were doing a bit of this on Magnitsky. I was very pleased to see cross-party support for the Magnitsky bill, putting visa bans on all people involved in the crime either by fraud or the murder of Magnitsky, and also going after the illicit way in which the proceeds were laundered in the West. There is actually money laundering investigation going on right now in, believe it or not, Switzerland. But this money is laundered in the West. The biggest, simplest thing that we could do is say, take Anna Chapman’s company.  Anna Chapman’s dodgy company had an account at HSBC. Anna Chapman’s dodgy company had a very reputable firm of accountants who refused to answer any questions. Three or four other prime institutions were all involved in this and said that it is nothing to do with us, we cannot comment. We did do the basic checks to see if these people actually existed.

Question Four: [Inaudible]

Edward Lucas: Well first of all, I am really honoured that you came here. I am a great fan of yours. I am not a member of the Valdai club. If I was invited I would not go. I mention this in the book. One of the things they are very good at doing is trading access for influence. There are a whole bunch of journalists who can’t even get visas to Russia. I think that is a really honourable category to be in. If you have annoyed them enough that they will not give you a visa you are probably doing something right. I think that there is a real danger in that think tank journalist world where people make their careers out of being Russia experts need to go to Valdai. They worry that if they do stuff that the Russians don’t like they will not get the Valdai invitation. Now I have to say that there are some very good people who go to Valdai who are absolutely forthright critics. Marshall Goldman for example, an American and friend of mine, he is very tough critic. He goes to Valdai, where they have to invite him to show that they invite critics. So I would not condemn people from going, though I would not because I do not want to be part of that game.

I was the Moscow Bureau Chief for The Economist in 2000. It was a really lonely time to be anti-Putin. Everyone was so relieved that it was not Yeltsin anymore. Finally, a guy who takes phone calls and turns up on time. Someone that we can deal with. This great western fantasy of a Russian leader that we can deal with. And so there was this almost overwhelming wave of pro-Putin sentiment. I had very influential people telephoning the Editor of The Economist demanding that I be fired. Because I was almost the only critic, there was an Estonian and a couple of others, I was one of a very small number of people who took a tough line on Putin. I accept that he did do some good things. The land reforms was good, the flat tax was good, there were some other quite important reforms done in the early years and credit where credits is due. One of the few good things that he did which is baffling to me was to go put flowers on Sakharob’s (42 minute) grave. So I am not some sort of monomaniac Putin-basher. But, we got locked into this idea from the very beginning that it did not matter that he was ex-KGB. And actually, the single most important thing about him was that he was ex-KGB. He was part of the last desperate throw of the dice to stop impeachment. The Yeltsin family handed Russia over to the Chekists. I have written in this book and my previous book that I reckon that there is an unbroken institutional continuity from the Cheka through to the FSB and it’s the same murderous xenophobic mindset and we should be really worried about it; we should be worried about people who care about Russia and we should be worried for people who care about our own countries because they don’t like us.

Question 5: How do you anticipate your future Russian adventures as a consequence of this book? Second question from speaker is inaudible.

Question Six: [inaudible]

Edward Lucas: I never predict the future it’s much too difficult. On the prospect of the regime, the regime rests on two pyramids, one is a pyramid of natural resource rents and the other is a pyramid of bureaucratic rents and their both in difficulty. The natural resource rents are in trouble because the oil price not only has to be high but rising and the bureaucratic rents are always increasing because whatever you pay someone off last year it always has to be slightly more. The law of corruption is that bribes go up rather than down. No one ever says “well, you’ve been a good customer for the last 10 years, I will charge you less this time.” They say “you depend on me so I’m going to charge you more.” Bribes tend to grow like cancer and the natural resource rents are based on clapped out gas fields and clapped out oil fields and terrible lack of new investment.

I think that the survival of a regime based on this model is arithmetical impossibility because they are running out of money. When I first went to Russia the breakeven point for the budget was $20 a barrel. If oil was $20 a barrel they were alright. Now I think the breakeven point is 80 or 90 and it’s going up all the time.

On the Catcher case, I think there are several odd things about this. There was a chapter of the book that had to disappear in the last minute because of that. All I say is that it’s a big question for why they went for a public trial. The usual way these things are done are a tap on the shoulder and they say “we’re not going to renew your visa.” Visas run out there’s no obligation to renew them, they can be dealt with quietly. I wonder whether it was an unwise political decision, to go for this very public deportation hearing. I’m just speculating but I wonder if there was a senior politician who said “I want to appear tough” and then went down this public route. What I do find odd is that if keeping a diary of a contemporaneous love affair indicates that it is genuine. Everything we know about how Russia trains illegals, is that you’re encouraged to live your cover. Keeping a diary is an absolutely classic way of doing it, not only because then you have a contemporaneous account of what you did but it also helps fix things in your mind, what you were doing where.  Whether or not the affair with Mike Hancock was genuine or not

I think MI5’s counter operation against the Russians is very severely constrained, it’s not a priority. We worry about Al-Qaeda. Counter terrorism generally is more important than counter espionage and in counter espionage we worry about the Chinese a lot. There are a lot of people who are tired and not used to the Soviet side.  For Russia espionage is a really big deal, for us counter espionage is not a big deal so there are no surprises that they have some successes.

Question Seven: [Inaudible]

Question Eight: What motivates the people?

Question Nine: Did Putin need any back up when he wanted to arrest Magnitsky

Edward Lucas: I get this a lot and I find it quite hard to answer. Why didn’t Magnitsky call the police? It’s one of the things that is so hard to get across to people, which is that the things that should be on your side are your enemy and you’re trying to get justice. You go to the press; the press prints articles against you. You go to your lawmakers, they don’t help you. You go to the police and the police lock you up for complaining.  You go to any government agency or institution that should help you and they’re on the other side. It’s a world of mirrors; you think you’re doing the right thing but it comes back to bite you.

What motivates them? I think part of it is a type of Chekist culture. People are born and raised in the culture of the Soviet secret police and they feel they are special, a lay priesthood. It is a big deal to be a Chekist. There’s a sense of solidarity, you don’t leave your friends in the loop. There’s a feeling that Russia has been beaten and humiliated and they’ve got to get our own back and therefore anything they do is justified. The West has been out to get Russia, they destroyed the Soviet Union and they humiliated them in the 1990s then expanded NATO and now that we’ve got some money we need to get our own back. The idea that West wants to be friends just escapes them, they think that’s just nonsense. When the West tries to do something nice, they think it’s part of a plot against them. I think it’s also just tens of billions of dollars. Bill Browder, the man Magnitsky worked for, reckons that the top thousand people in Russia over 10 years looted a trillion dollars. It is absolutely incredible how much money has gone to these top bureaucrats. The enormous countries that they own or control, enormous oil trading companies that you’ve never heard of that have acquired huge chunks of Russia’s oil exports. These gas trading companies and all this weird stuff going on and when you try to follow up where they are, you get to places like the Virgin Islands. You get to Jersey and by the time you’ve gone that far you’ve got libels up to here from people who are trying to stop you writing about it. It’s very well protected.

Sir Paul Dukes, once he had retired, became a yoga instructor and has written books, I haven’t read it, but I’ve heard it’s very good.

Dr Julian Lewis MP: there are pictures of him standing on his head around the age of 70.

Edward Lucas: I think it’s an advert for getting out of espionage early.

The countries that experience the sharp end are Estonia, Latvia and Lithuania, Czech Republic and Slovakia and Hungarians. Particularly the countries that have Russian minorities because when they go back to Russia, they get threatened by the FSB who say that really horrible things will happen to their families unless when you go back to your country you do things that we want.

Although I focused on Herman Simm, the Estonians discovered an incredibly damaging traitor and they prosecuted him publicly. They stuck him in gaol and didn’t do any of the little tricks. There have been similar cases in other countries where when people have been caught and what happens? Early retirement. They don’t want a scandal.

Countries like America, which has a very tough counter intelligence services, get really cross about this. These so called Eastern European countries, I don’t like that term, but rather front countries, if you want, have a very clear idea about what Russia is up to and we should really take their advice.

Dr Julian Lewis MP: Thank you very much. I would like to thank Edward for that terrific presentation.

End of transcript


Edward Lucas is the Central and Eastern European correspondent for The Economist and is Editor of the International section. Having covered Russia and Central and Eastern Europe for more than 20 years as a journalist, Edward Lucas offers uniquely valuable insights into the political and economic climate of the former communist countries and how current trends will affect the West. He also is an expert on energy security and on Russian foreign and security policy.

Edward is the author of an important, sobering and controversial book about how the new Russia threatens the world, especially economically, and what the world should be doing about it. The New Cold War: Putin’s Russia and the Threat to the West looks penetratingly at how the Kremlin has used the tools of autocracy and their new energy wealth to build a popular ‘stability’ at home and extend dangerous power back into its former satellites and beyond.

Besides The Economist, he has occupied several other European desks at the world’s foremost news weekly, including Moscow Bureau Chief from 1998 to 2002. He studied economics at the London School of Economics and speaks five languages—German, Russian, Polish, Czech and Lithuanian.

He’s been a foreign correspondent for The Independent, the BBC World Service, and a producer at BBC Radio. He also was a major shareholder and Managing Editor of The Baltic Independent, an English-language weekly in the Baltic States.


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