In the summer of 1999, the Yeltsin era was coming to an end and those at the pinnacle of power feared for their freedom and even their lives. There were the first signs of an economic recovery, but ordinary citizens were still living in poverty and waiting months to be paid. The Yeltsin entourage, which was widely hated for its role in pillaging the country, was increasingly isolated. According to Russians and Westerners with access to the Kremlin leadership, the leading members of the Yeltsin “family”—Tatyana Dyachenko, the President’s daughter, Boris Berezovsky, the country’s richest man and her close adviser, and Valentin Yumashev, a member of the Security Council and Dyachenko’s future husband—lived in fear of a cruel reckoning. Many ordinary citizens were convinced they would never surrender power.

During the 12 days from September 4-16, however, everything changed. Four Russian apartment buildings were blown up in Moscow, Buinaksk, and Volgodonsk. The controversies that wracked the country over corruption and privatization were suddenly forgotten. Eight years of post-Soviet Russian history was telescoped into the shocking images of bodies being carried out of the rubble of bombed apartment buildings.

Putin, the newly appointed Prime Minister, expressed perfectly the desire of the country for revenge. On September 24, Putin said, “We will pursue the terrorists everywhere. If they are in an airport, then in an airport, and, forgive me, if we catch them in the toilet, then we’ll rub them out (mochit) in the toilet…. The question is closed once and for all.”

Russian officials said there was a “Chechen trail” in the bombings. The wording was unusual, not proof but a “trail.” The Chechens insisted that they had nothing to do with the bombings and no proof of their involvement was ever adduced. But Russian forces were already fighting Chechen rebels in Dagestan, and the country was looking desperately for someone to blame. Russians were opposed to further involvement in Chechnya but, in the wake of the apartment bombings, they were now ready for a new Chechen war.

But were the bombings what they were depicted to be? In fact, the mystery of who bombed the Russian apartment houses in 1999 has not been solved to this day. And to the extent that there is evidence as to the perpetrators, it points not to Chechen terrorists but to the Kremlin leadership and the FSB.

Russia in the spring of 1999 was a nation traumatized by impoverishment and criminalization under Yeltsin and far from certain that the presidential elections set for June 2000 would take place. Yeltsin’s popularity rating stood at 2 percent, that of his newly appointed Prime Minister and heir apparent, Vladimir Putin, was also 2 percent. It was regarded as nearly inconceivable that anyone connected with Yeltsin could win a free election. But there was a widespread fear that Yeltsin would find a pretext for declaring a state of emergency so that the elections would not take place.

On June 6, Jan Blomgren, the Moscow correspondent for the Swedish newspaper, Svenska Dagbladet, reported that a faction in the Kremlin was seriously weighing “terror bombings that could be blamed on the Chechens.”¹ On July 22, Alexander Zhilin, a military journalist, in the July 22 issue of Moskovskaya Pravda, quoted “trustworthy sources in the Kremlin,” that persons close to Dyachenko were planning to use terror attacks in Moscow to discredit Yuri Luzhkov, the mayor of Moscow, who had emerged as one of Yeltsin’s most serious political opponents. The plan was referred to as “Storm in Moscow” and was to include attacks on the headquarters of the FSB, MVD and Federation Council, kidnappings by Chechen rebels and a war between criminal gangs. All of this was intended to create the impression that Luzhkov had lost control over the city.²

During this fateful summer when Moscow was awash with rumors, I was friendly with a Russian political operative who was well connected to the higher levels of Russian power. When I met him, he told me about the growing fear in the Kremlin about the possibility of losing power and the indications that Moscow would be the scene of a huge provocation. He said that the issue was the security of Yeltsin and his family in the case of a handover of power. He said that if there was no agreement on terms, “they will blow up half of Moscow.”

I sensed the uneasiness but did not know how to assess the prediction of my friend. I had no illusions about Yeltsin and his cronies but it was hard to imagine that a man who came to power as a result of a peaceful anti-communist revolution with massive public support would be willing to murder his own people to hold onto power. Developing events, however, were to change my mind.

At 9:40 p.m. on September 4, a truck bomb exploded in Buinaksk, Dagestan’s second-largest city. It destroyed a five story apartment building, which housed soldiers from the 136^th Motor Rifle Brigade.

The events in Buinaksk, although major, did not stun the nation because Dagestan was a war zone. On September 9, however, the terrorists struck again, this time in Moscow. Shortly after midnight, a bomb exploded in the basement of a building at 19 Guryanova Street in a working class area in the southeast part of the city. The central section of the building was obliterated, leaving the left and right stairwells standing on each side of a gaping hole. Fires raged for hours under the rubble. “It’s like hell underneath,” one rescuer said. “Even if they survived the blast, they would have been burned alive.”³ In the end 94 persons were killed and 164 injured. Russian officials blamed the bombing on Chechen terrorists seeking revenge for their “defeat” in Dagestan. The Moscow FSB announced that items removed from the scene showed traces of TNT and hexogen, a powerful military explosive.

On September 13, four days after the explosion on Guryanov Street, there was an explosion at five o’clock in the morning at 6 Kashirskoye Highway in Moscow that flattened a nine-story brick apartment building, transforming it into a pile of rubble. The explosion took place at a time when almost all of the residents were asleep. Muscovites awoke to graphic television footage showing emergency workers feverishly going through the debris. The death toll was eventually established at 119 with 200 injured.

The Russian capital was now seized by fear. Every one of the city’s 30,000 residential building was ordered to be checked for explosives and residents organized round-the-clock patrols. There were thousands of calls to the police reporting suspicious activity.

On September 16, the terror spread. With the funerals of the Moscow victims still going on, a truck bomb exploded in Volgodonsk in southern Russia. The blast ripped off the facade of a nine-story apartment building. The dead bodies of 18 persons, including two children, were pulled from the rubble. Eighty-nine persons were hospitalized. The explosion, like that on Kashirskoye Highway, took place at five in the morning. The psychological shock was so great that afterward hundreds of people were unwilling to sleep in their homes and insisted on spending the night outdoors. The bomb left a crater 3.5 meters in depth and 13-15 meters in diameter. Parts of the GAZ-53 vehicle that carried the bomb were dispersed over a radius of 1.5 kilometers.

The Volgodonsk bombing appeared to mean that there would now be attempts to bomb apartment buildings in cities outside of Moscow. This expectation was soon borne out, but with surprising consequences. At 8:30 p.m., on September 22, Alexei Kartofelnikov returned home to his apartment in Ryazan, a city 120 miles southeast of Moscow after a weekend at his dacha. He noticed a white Lada parked in front of the building at 14/16 Novoselov Street with a male passenger in the back seat. The last two numbers on the car’s license plates were covered with pieces of paper that had “62,” the code for Ryazan, written on them. Kartofelnikov went up to his apartment and called the police. His daughter, Yulia, a 23-year-old medical intern, went out onto the balcony and watched as a man emerged from the basement, checked his watch and got into the car where there were two persons.

When the police arrived, Yulia insisted that they check the basement. The basement had been used as a toilet by local derelicts so they were far from enthusiastic. But the police finally went down the steps. They ran back up shouting, “There’s a bomb.” The building was soon engulfed in chaos. Police began going door to door telling residents to leave. People took babies out of bathtub, grabbed documents and threw on overcoats. Those too ill or weak to leave the building were left behind.

As residents watched on the street, the police, including Yuri Tkachenko, the head of the local bomb squad, entered the basement. Tkachenko, disconnected a detonator and timing device and then tested three sacks of a white crystalline substance with an MO-2 portable gas analyzer. The contents of the sacks tested positive for hexogen, the same substance used in the previous apartment bombings. There now was no question but that someone had tried to blow up the building.

The sacks were taken out of the basement at around 1:30 a.m. and driven away by the FSB. The FSB agents forgot to take away the highly professional military detonator, however, which was left in the hands of the bomb squad. They photographed it the next day.

On the basis of descriptions by Kartofelnikov, his daughter and a neighbor, the police prepared identi-kit portraits of the suspects. In the meantime, the railroad stations and airport were cordoned off and roads leading out of the city were blocked.

As morning broke, the white Lada was found abandoned in a parking lot. A short time later, a call to Moscow was made from a public telephone in Ryazan, and the operator, who connected the call, caught a fragment of the conversation. The caller said there was no way to get out of town undetected. The voice on the other end replied, “Split up and each of you make your own way out.” The operator reported the call to the police and they traced the number. To their surprise, the number belonged not to Chechen terrorists but to the FSB. The terrorists were soon arrested and to the stupefaction of the police, produced FSB identification. The FSB called and ordered them released.

The FSB now had no choice but to offer some type of explanation.             On Friday, September 24, the FSB director Nikolai Patrushev came out of a Kremlin meeting and announced that the evacuation of the building had been part of a training exercise.

Patrushev’s statement was in direct contradiction to what the authorities had been saying for two days. On the morning of September 24, Alexander Sergeev, the head of the Ryazan FSB, appeared on television and congratulated residents on being saved from a terrorist attack. Vladimir Rushailo, the Interior Minister, announced on national television that an attempted terrorist act had been foiled. But now Patrushev said the incident was a test. The sacks found by the bomb squad contained sugar and the reading that indicated that they contained hexogen was an error. Patrushev said that there were similar exercises in other cities but only in Ryazan did the people react promptly. He complimented the residents on their vigilance.

The strange “training exercise” provoked anger in Ryazan where people had spent the night on the street. Journalists now raised the possibility that all the bombings—the four successful bombings and the failed bombing in Ryazan—had been the work of the FSB. Society, however, proved incapable of reacting in an organized fashion. The day after the supposedly fake bomb in Ryazan was discovered, Russian aircraft began bombing the Grozny Airport, and on October 1 Russian troops moved across the border launching the second Chechen war.

Russians refer to Hitler’s “treacherous attack” on the Soviet Union, and it was anger over the treachery that helped to mobilize the population in the first days of World War II. The apartment bombings played a similar role. For the vast majority of Russians, the Chechens, by bombing the buildings in Buinaksk, Moscow and Volgodonsk, had carried the war to the Russian people and now had to be made to pay a price. The Ryazan episode was disturbing but it slipped from consciousness, temporarily forgotten amid the rush of fast moving events.

Five years earlier, the first Chechen war had begun with the slaughter of Russian troops trapped in their tanks in the narrow streets of Grozny on New Year’s night, 1994–95. This time, the invasion of Chechnya was carried out methodically and seemingly with success. In the wake of the apparently successful Russian revenge attack, Putin’s popularity soared. In August, 2 percent of the population favored Putin for the presidency. By September, his popularity was 4 percent. In October, it reached 21 percent. In November, Putin was favored for the presidency by 45 percent of the population, far more than any other candidate. It was now clear that there would be no need to introduce emergency rule and postpone the elections. Putin would be able to win the election on his own with the help of a new war.

On September 14, the day after first Moscow bombing, Putin said that the security services were certain of the participation of Osama Bin Laden in the bombings. Nikolai Patrushev, the director of the FSB, said that the organizers of the bombings were “international terrorists dug in in Chechnya with the connivance of the official powers in Grozny…” These statements had some effect in leading the West to tie the apartment bombings to international Islamic terrorists.

More important, however, was the sheer difficulty of accepting the idea that any regime would murder hundreds of its own citizens to terrify the nation and hold on to power. This refusal to believe the unbelievable, however, came at a cost. It crippled Western and in particular U.S. policy toward Russia, rendering it naive and ineffectual. From the moment Putin took power the West was dealing with Russia on the basis of a picture of the country that had no relation to reality.

In December 1999, Russia held parliamentary elections and the groundswell of support for Putin and the new war in Chechnya transformed the political landscape. The “Unity” Party, which was created on the advice of Berezovsky and had no platform besides support for Putin, achieved a striking political success. If, under Yeltsin, a powerful President was confronted by an oppositional parliament, now the pro-Putin forces achieved a firm majority in Parliament and there was no longer a political base for opposition.

On New Year’s Eve, Yeltsin resigned and Putin, who only months before had been almost completely unknown, was appointed acting President in a Kremlin ceremony and given the nuclear codes. Putin then issued a decree granting Yeltsin lifelong immunity from prosecution.

With the help of the September bombings, the anger of the population was redirected from the criminal oligarchy that had pillaged the country to the Chechens. The election took place on March 26, 2000. Putin eschewed serious campaigning and avoided even explaining where he stood on the major issues facing the country. Despite this, he won with 54 percent of the vote.

The strange events that made possible Putin’s rise to power were not an anomaly. In fact, the bombings were the logical culmination of the history of the previous eight years. Russia’s transition from communism to capitalism in the 1990s led to an upheaval that destroyed the moral orientation of the population. Under communism, Russia was organized on the basis of false values, but a moral code of sorts did exist. In the post-Soviet era, the idea that there was such a thing as right and wrong was all but jettisoned, and a new hierarchy emerged in which the gangster was king.

The criminal takeover of Russia under Yeltsin unfolded with a seemingly tragic inevitability. The transformation of economic structures was dramatic but it took place without the most important pre-condition for civilized capitalism: the rule of law.

On January 2, 1992, the reform government led by Deputy Prime Minister Yegor Gaidar abruptly freed prices. In ten months, prices rose 25 to 30 times. By April, almost all the money in people’s savings accounts—money saved for decades—had disappeared.

Officially, privatization started in 1992 with the distribution to the population of vouchers. Each voucher, denominated at 10,000 rubles, supposedly represented a citizen’s share of the national wealth. Factories were converted into joint stock companies and citizens were invited to exchange their vouchers for shares in any enterprise.

Most Russians, however, had no idea what to do with their vouchers. Some used them to buy shares in their own factories. Others invested them in supposed voucher funds which advertised widely and promised dividends. Many vouchers were sold on the street, often for as little as $10 or a bottle of vodka. Mysterious persons who looked like vagrants appeared at bus stops and metro stations with cardboard signs on which were written the words “I buy vouchers.” The shabby appearance of the purchasers was deliberate. It created the impression that the vouchers had no real value. Watching this spectacle in 1993 and 1994, I also formed the impression that the vouchers were useless. But corrupt business and organized crime groups were behind the vagrants. Through them, the first private property was created legally in Russia, and the first fortunes.

Representatives of the groups that collected vouchers appeared at auctions and used them to buy shares in industrial enterprises. By some estimates, a third of Russia’s industry passed into their hands for vouchers worth $1.2 billion. As for the rest of the population, in most cases their investments in voucher funds or shares of their own factory produced nothing.

In the latter part of 1994, voucher privatization was succeeded by privatization for cash. By now, there was a group that could participate in it. Voucher privatization produced at least five oligarchs, Mikhail Fridman, the head of the Alfa Group, Oleg Deripaska, who gained control of the Sayansk Aluminum Factory, Vladimir Bogdanov, the head of the Surgutneftegas oil concern, Kacha Bendukidze, who received a share of the giant Uralmash machine building factory, and, in part, Vladimir Potanin through his firm, Microdin, which worked actively in the privatization market. In addition, several others had become billionaires by appropriating state resources with the help of corrupt connections: Mikhail Khodorkovsky (currency operations), Boris Berezovsky (automobiles), Valdimir Gusinsky (real estate), and Alexander Smolensky (banking).

Many of the newly rich set up banks, and these banks began to be “empowered” to handle government accounts. The official rate of return on the government’s money was not high, but what mattered was that the empowered banks, ignoring instructions that were not enforced anyway, treated budgetary funds as free capital available for investment. They delayed payments for months, often using the money for short term inter-bank credits that were given at rates as high as 400 percent. In the meantime, non-payment of salaries became a reality for millions of Russians.

It was this new group of millionaires and billionaires who, with the advent of the second stage of privatization, were able to buy up Russia’s mines and factories for a fraction of their true value. Enterprises were officially sold at auction. But the auctions were almost always fixed. The State Property Committee routinely eliminated bidders or provided information about competing offers to the predetermined winner. True competitive bidding was a rarity and in the event that a powerful group was outbid by an insistent competitor, the successful bidder could easily pay for his tenacity with his life.

The prices for which enterprises were sold stunned Russian society; 324 factories were sold at an average price of less than $4 million each. The Chelyabinsk Metallurgical Combine went for $3.73 million. The Murmansk Trawler Fleet, which consisted of a hundred ships, was sold for $2.5 million. On September 9, 1994, the bulletin, “Independent Strategy,” wrote:

The greater part of the basic productive funds of Russia are being sold for somewhere around $5 billion. Even if one considers that in Russia the price of the basic means of production is equal to her gross domestic product [in the West, it usually is at least 2.6 times higher] … in effect, 300 to 400 billion dollars; the sum realized in privatization is minimal. For this reason, the agency recommends English investors not to miss the chance and to take part in the purchase of Russian enterprises.”⁴

In late 1994, the Russian government launched the “loans for shares” program which made possible the creation in Russia of companies comparable in size to the largest American corporations.

Under the program, the government mortgaged shares in the most desirable non-privatized enterprises in return for loans. Once an enterprise had been mortgaged, the proprietary bank was free to exploit it, and when the government failed to repay the bank loans, which given the state’s revenue shortage was always the case, the enterprise became the property of the bank that provided the original loan.

The loans for shares auctions resembled a play. A previously unknown firm would offer a bid that was almost identical to the starting price set by the bank that organized the bidding. The organizing bank could then, after ruling out other bids on various pretexts, offer a bid that was slightly higher than that of its “competitor.” The organizing bank thereby effectively set the price at which the enterprise it was buying would be sold.

Loans for shares completed the process of creating a class of super-rich oligarchs by allowing them to acquire the nation’s assets at almost no cost. The scheme, however, provided very little in badly needed revenue to the government. In 1995, for example, the total revenue from the mortgage auctions of 21 of Russia’s most profitable enterprises was $691.4 million and 400 billion rubles, a fraction of the real value of what had been the crown jewels of the Soviet economy.

In April, 1996, the oligarchs were already a well-established institution in Russia. Despite the fact that in almost all cases they owed their wealth to theft, they presented themselves as enterprising capitalists with an indisputable right to rule. In a letter signed by 13 oligarchs and published in leading Russian newspapers, they issued a veiled threat that appeared to be directed against the communists, who were gaining in the public opinion polls. “Those who rely on social confrontation and ideological revanchism,” the letter said, “should understand that the national entrepreneurs have the necessary resources and will to deal with … unprincipled … politicians.”

The pillaging of the country, however, led to economic collapse. In the period 1992–98, Russia’s gross domestic product fell by half. (During the Great Depression, the American economy shrunk by 30.5 percent.) The collapse of industrial production was even greater, declining 56 percent between 1992 and 1998. This did not happen even under German occupation. Russia became a classic third world country, selling its raw materials—oil, gas, and precious metals—to import consumer goods. People went months and even years without being paid. As a result, millions were forced to spend weekends in the countryside growing their own food in order to survive.

The economic disaster was accompanied by a demographic catastrophe. In the years 1990–94 male life expectancy fell by more than six years. In 1998, it was 57 years, the lowest in the industrial world. Female life expectancy fell from 76 to 70. Child mortality doubled. The almost vertical rise in the death rate was nearly unprecedented for a country that was not at . At first, Western demographers did not believe the figures. During the 1990s, the Russian population overall fell by 750,000 a year.

The government during these years, having received very little from privatization, regularly spent more than it had. In a bid to narrow the deficit, it began issuing short term government obligations (GKOs). These were denominated in rubles and usually had a three- to six-month term. The market grew from $3 billion at the end of 1994 to $47.6 billion in 1996 and $64.7 billion in 1997. As the government’s financial position worsened, however, the rate of interest rose, sometimes exceeding 200 per cent. By mid-1998, the government was spending $1 billion a week simply to pay on its obligations. Faced with an overwhelming financial crisis, on August 17, the government devalued the currency, defaulted on $40 billion worth of treasury bills and halted the repayment of commercial debt. Prices rose sharply and the nascent middle class was destroyed.

The 1998 collapse was a shock for Russian society. People returned from summer vacations to find that the cash machines of their banks were locked. Currency exchange points posted new ruble-dollar exchange rates every hour. People began to scoop up everything in the stores, including salt, sugar, matches, and flour. Many small businesses collapsed, and there was a rash of contract killings of borrowers who could not repay their debts. Living standards fell by an estimated 40 percent.

In 1998, in the wake of the Russian financial crisis, Yeltsin nominated Yevgeny Primakov, the former head of the Foreign Intelligence Service, to be Prime Minister. The crisis had destroyed much of the support Yeltsin still had, and the appointment of Primakov was a compromise with the political opposition after the Duma twice voted down Yeltsin’s attempt to reappoint the former Prime Minister, Viktor Chernomyrdin, to the post, causing a sharp decline in the economy. Primakov, however, was not content with the political status quo. Once appointed, he authorized an investigation of the Yeltsin family and of some of the oligarchs, starting with Berezovsky.

In the fall of 1997, Carla del Ponte, the Swiss Prosecutor General, was given police reports showing that Russian organized crime controlled more than 300 firms in Switzerland and that a Swiss businessman of Albanian origin, Behgjet Pacolli, who headed Mabetex, the construction company that was doing reconstruction work on the Kremlin, was providing unexplained funds to Yeltsin and his daughters. In September 1998, these documents were forwarded to Russian Prosecutor General Yuri Skuratov. On January 22, 1999, the office of Mabetex was raided in Lugano, and records were discovered that showed payments of $600,000 on the credit cards of Yeltsin’s daughters. It also seemed that Pacolli had paid kickbacks to Pavel Borodin, the director of the presidential administration, for the contracts to work on the Kremlin. Skuratov, meanwhile, intensified his investigation into the activities of Berezovsky. On February 2 and 4, heavily armed FSB agents raided Aeroflot and the private security firm Atoll, which was also associated with Berezovsky.

The investigation of Dyachenko and Berezovsky was a direct challenge to the regime. It came, moreover, at a time when Yeltsin was reportedly suffering blackouts and periods of disorientation and many important decisions were being made by Dyachenko.

The Yeltsin entourage was not slow to react. The FSB under then-Director Vladimir Putin secretly filmed Skuratov in a sauna engaging in sex with two prostitutes. The film was shown on the state television channel, RTR in primetime, and Skuratov was forced to resign. An arrest order against Berezovsky was revoked.

The elimination of Skuratov, however, could not eliminate the long-term threat to the Yeltsin “family,” in the event of a future loss of power. Yeltsin’s health was deteriorating rapidly. Sensing Yeltsin’s weakness, the opposition in the State Duma scheduled a vote on impeachment. For months, Yeltsin had absented himself from the daily political struggle and avoided decisions. On May 12, the day before the opening of the hearings, however, he fired Primakov and installed the Interior Minister, Sergei Stepashin, as acting Premier. Yeltsin’s readiness to fire Primakov, the most popular politician in the country, was taken as a sign to the deputies that, his health notwithstanding, in the event of impeachment he was ready to suppress the parliament by force.

The impeachment vote failed, but Yuri Luzhkov began to organize opposition to Yeltsin in anticipation of the 2000 elections. He recruited Primakov for his Fatherland-All Russia movement and said that if Primakov ran for President, he would support him.

At first, members of the Yeltsin entourage hoped that Stepashin would be able to defeat Primakov in an election. It soon became clear, however, that Stepashin did not relish attacking Yeltsin’s opponents, and there were reports that he rejected schemes for introducing a state of emergency and cancelling the Presidential elections out of fear of igniting a civil war. Among the schemes being discussed by insiders was “Storm in Moscow,” which was reported by Moskovskaya Pravda. On August 5, however, with the political crisis at its peak, a Chechen Islamist force invaded Dagestan.

The invasion of Dagestan was suspicious from the start. In late spring, with an attack expected, the authorities withdrew Russian internal troops that were stationed on the border. A high-ranking Russian police official later said that if the internal forces had not been withdrawn, the invasion would not have been possible.

When a force of 1,200 armed men commanded by the Chechen leader Shamil Basaev entered Dagestan from Chechnya, they encountered no serious resistance. On August 23, they withdrew, again without encountering resistance. A Russian commander told a reporter for Time magazine that he had Basaev in his sights but was ordered to hold his fire. “We could have wiped him out then and there,” he said, “but the bosses in Moscow wanted him alive.”

On August 9, Stepashin was dismissed and Putin was named the new Prime Minister. The prospects of the all but unknown Putin, like those of anyone associated with Yeltsin, appeared negligible. But between September 4–16, the apartment buildings in Moscow, Buinaksk, and Volgodonsk were blown up, completely changing the course of political events.