Obama’s crusade against the blight of US prisons Left and right agree: American criminal justice needs urgent reform Not much unites Barack Obama and US industrialists the Koch brothers. Yet on the US criminal justice system the Democratic president and his right­leaning antagonists speak with one voice. The bursting jails of the United States are a moral disgrace, a waste both of financial resources and human life. Their reform is long overdue, and Mr Obama appears determined to tackle the subject. In the words of the Koch brothers’ spokesman, this is “morally, constitutionally and fiscally” the right thing to do. Any number of statistics bring home the awful scale of US incarceration. With one in 20 of the world’s people, the US locks up a fifth of its prisoners. At any one time its federal penitentiaries and state jails contain more than 2m people (a tenfold increase on 1970). About 600,000 of them are released every year, to be replaced by a similar number, often the very same people swiftly reoffending. Seen from the viewpoint of its nonwhite minorities the US criminal justice system is still worse. Just 30 per cent of US citizens are black or Hispanic, but twice as high a proportion of its prisoners are. The US incarcerates a greater portion of its black male population than South Africa did at the height of apartheid. It leaves entire communities scarred by prison or the threat of it. More than two­thirds of black men born since the mid­1970s have a criminal record. This brings a greater risk of joblessness and broken homes — in Mr Obama’s words, “a source of inequity that has ripple effects on families and on communities”. This issue is political in more ways than one. Time in jail frequently leads to disenfranchisement — in 2012, a total of 5.8m US citizens were barred from voting. It is undeniably a racial issue; for some states, more than a fifth of blacks are not allowed to vote. In a week in which he became the first president to visit a federal prison, Mr Obama also broke new ground by delivering a speech that took the side of prisoners. His approach rests on two pillars. The first is to stop incarceration at source, through saner sentencing laws and greater emphasis on investing in the community. Too many nonviolent offenders end up spending long periods in jail, because mandatory sentencing laws such as “three strikes and you’re out” give judges little choice. These laws need to be struck off, and judicial discretion restored. The other pillar is how prisoners are treated once behind bars. President Obama appealed for prisons to be seen as places of rehabilitation, not just houses of punishment. It is a pitiful waste of taxpayer dollars to lock people away for years, leaving them prepared only for a career in crime after release. He also called those with a criminal record to be allowed to vote — vital, surely, if they are to be accepted as full members of society again. The most promising idea, echoed in a recent speech by Michael Gove, the UK justice secretary, is for prisoners to be rewarded with reduced terms for undertaking programmes that will cut their risk of reoffending. It has support on both sides of Congress. Borrowing the president’s words, there is no better way to show how justice and redemption go hand in hand. Mr Obama is enjoying an Indian summer. Falling crime rates — a phenomenon largely unrelated to higher incarceration — have mellowed the public mood on the topic of criminal justice. Nobody should expect miracles — the US is a violent society, with more than 160,000 murderers and as many rapists behind bars. Much of what is needed falls to the states, where most prisoners are kept. But this moment of bipartisan consensus must be grasped.

‘I personally brought Putin to power’ From Kremlin insider and powerful oligarch to embattled exile, Sergei Pugachev claims he is the victim of a legal campaign designed to ruin him — one that is being orchestrated by his old friend Vladimir Putin. By Catherine Belton

It is a late May evening and Sergei Pugachev, the exiled Russian tycoon, is flicking through an old family photo album. In one photograph, Mr Pugachev’s son, Viktor, is captured with eyes downcast as Maria Putina, the Russian president’s daughter, leans to whisper in his ear. In another, Mr Pugachev’s other son, Alexander, is posing on a wooden spiral staircase in the Kremlin library with Vladimir Putin’s two daughters. At the edge of the photo is a smiling Lyudmila Putina, then still the president’s wife. The two families were close. Mr Putin’s daughters would often come to the Pugachevs’ house from the president’s neighbouring residence outside Moscow after school. As he thumbed through the pictures at his house in Chelsea, London, those days seemed long ago and very far away. But his past was catching up with him. The former billionaire, who left Russia in 2011, was hearing whispers that Mr Putin’s government was seeking to extradite him to stand trial in a criminal case in Moscow. Russian authorities accuse him of embezzling hundreds of millions of dollars from Mezhprombank, a bank he co­founded. He is also fighting a worldwide freeze on his assets issued by London’s High Court. Just a day before, Mr Pugachev sought the protection of the UK’s counterterrorism squad after finding suspicious devices on his cars, including the vehicle used only to take his three youngest children to school. He feared they could contain explosives, though it emerged this week that some were tracking devices planted by UK private detectives working for the Russian state. With legal and possibly physical threats mounting, Mr Pugachev fled to France, defying a UK court order to remain in the country. The High Court this week weighed whether he should be ordered to return. For a long time, Mr Pugachev thought the legal campaign against him was being crafted by Kremlin underlings who he says systematically seized his former business empire — which spanned shipbuilding, energy and construction. But as the pressure intensified, he concluded it could only be coming from the top. “How could Putin behave like this?” Mr Pugachev says. “I did everything for him. I even made him president.” Though some will question that claim, it is clear Mr Pugachev has undergone a remarkable transformation from consummate Kremlin insider to embattled exile. His case is the latest example of what happens to Russian oligarchs who fall out of favour with the Kremlin. Ever since Mr Putin arranged the detention of Mikhail Khodorkovsky in 2003 and took over his Yukos oil empire, the Russian courts have been used to pursue the Kremlin’s foes and reassign property. Mr Pugachev fears the UK courts are now unwittingly becoming an extension of that regime. Burnishing Putin For Mr Pugachev, 52, the legal battles are personal and laced with irony. Already established by the 1990s, Mr Pugachev aided Mr Putin’s rise to power. In interviews, Mr Pugachev described how he worked behind the scenes to help secure President Boris Yeltsin’s reelection in 1996 — and then smooth the way for Mr Putin’s ascension to the pinnacle of Russian power. Mr Pugachev always kept a low profile, but now — with what remains of his fortune and his freedom at risk — he is beginning to tell his story. According to his account, he was one of the most influential actors at the Kremlin during Russia’s momentous power shift in the late 1990s. But he was always in the shadows, a tactician who forged close relationships with the people who ruled the Kremlin — some of the same people who would later cast him out in the cold.

Business rivals say they are sceptical of Mr Pugachev’s account. But through interviews and reviews of documents, photographs and other evidence, the Financial Times has confirmed many aspects of Mr Pugachev’s account of his rise and dizzying fall from grace. For the Russian state agency pursuing Mr Pugachev, the former tycoon’s story is far different. The Deposit Insurance Agency calls him a “fraudster” and dismisses Mr Pugachev’s concerns for his safety as “an attempt to fabricate an excuse for his admitted contempt of court”. Mr Pugachev’s story that he is the target of a politically­motivated campaign is a “smokescreen that doesn’t justify him running away and hiding hundreds of millions of pounds”, a DIA representative says. “In the current climate, it’s a very attractive line to peddle. But it doesn’t answer the legal case against Mr Pugachev that he is a fraudster and a liar.” The claims against Mr Pugachev date back to the financial crisis. Russian officials say he siphoned Rbs28bn from Mezhprombank in 2008, shortly after it received a $1.2bn bailout by Russia’s central bank. The DIA accuses Mr Pugachev of placing $700m of those funds into the Swiss bank account of a company where his son was a director. (Mr Pugachev has said the funds stemmed from a separate commercial loan.) According to a person close to the DIA, Mezhprombank was being operated like a Ponzi scheme, with the bank issuing new loans to shell companies in order to pay off previous loans. Mr Pugachev insists he is not hiding funds and that he ceased all dealings with the bank’s operations after he divested his stake on becoming a senator in 2001. He says the Kremlin­led takeover of his business empire, combined with hefty legal fees, has all but wiped out his fortune, estimated by Forbes at $2bn in 2008. Recently, he cast a forlorn figure in London’s High Court, where he sometimes chose to defend himself instead of paying for lawyers. Election success The Leningrad where Mr Pugachev grew up was the epicentre of the underground movement that chafed against Soviet control. As Mikhail Gorbachev launched economic reforms in the 1980s, Mr Pugachev saw an opportunity, forming co­operatives to trade jeans, cars and cognac. In 1991, he moved to Moscow where he co­founded International Industrial Bank, or Mezhprombank, which was among the first banks to be granted a hard currency licence. He also received permission to open a financial company connected to the bank in San Francisco, where he spent part of each year. By his account, Mr Pugachev’s US connections played a decisive role in Yeltsin’s re­election in 1996 against stiff Communist opposition. Thanks to a connection with Fred Lowell, a San Francisco lawyer close to the Republican party, Mr Pugachev brought in a team of US spin­doctors led by George Gorton, a top strategist for the then governor of California, Pete Wilson. Holed up in Moscow’s President Hotel, Mr Gorton’s team worked with Yeltsin’s daughter, Tatyana Dyachenko, to launch a US­style election campaign, humanising Yeltsin and stressing the danger of a Communist return to power. Moscow commentators still debate the importance of the US strategists in clinching Yeltsin’s victory. But it seems clear their contribution won Mr Pugachev the undying gratitude of Ms Dyachenko, whose role in running the country grew as the president’s health failed. “They were the last real elections in Russia,” Mr Pugachev says. Mr Pugachev first met Mr Putin in the 1990s, when he was working in the office of St Petersburg’s mayor. But it was when Mr Putin moved to Moscow in 1996 that the two men became better acquainted, Mr Pugachev says. Moscow legend has it that Boris Berezovsky was the oligarch who made Mr Putin king. But others say Mr Berezovsky, who later fled Russia and died at his home in England in 2013, was a mythmaker who exaggerated his role. Mr Pugachev says he was the one who introduced the idea of Mr Putin as a potential successor to the Yeltsin family. His friendship with Ms Dyachenko and Valentin Yumashev, Ms Dyachenko’s husband and then Yeltsin’s chief of staff, has been confirmed by the FT.

He says he sensed that a “real coup” was under way as parliament prepared to impeach Yeltsin and criminal charges were prepared against his family. “I understood we were losing the country,” he says. “We had to try and keep what we’d fought for.” Working alongside Mr Putin — then head of the FSB security service — Mr Pugachev helped fend off these threats. In his account, Mr Pugachev first proposed Mr Putin as a candidate to take over as prime minister and then called on Ms Dyachenko and Mr Yumashev to persuade Yeltsin to step down. “I personally brought Putin to power,” Mr Pugachev says. “I worked day and night for nine months to do this.” Mr Pugachev says he believed then that Mr Putin was a forward­thinking force in Russian politics, a man known for implementing orders. “We needed someone who 24 hours a day was going to be working on developing the country,” Mr Pugachev says. But he now admits his initial assessment of Mr Putin was wrong. “This is the sorry story. I’m horrified myself.” He believed Mr Putin was someone who could be controlled — a man who had come from such a poor background that it was easy to impress him with the trappings of presidential life. “Before the collapse of the Soviet Union, he lived most of his life in communal flats. He was 40 before he began to work in the mayor’s office. This is why he can’t give up all this now — he wants all these palaces and riches — because where he came from before he had nothing.” At the beginning of Mr Putin’s presidency, Mr Pugachev drove the former KGB agent to his new residence in Novo­Ogarevo where a 50m swimming pool beckoned. “His eyes went so big and round. I understood that he wouldn’t need anything else in life. I thought this would be the limits of his dreams. But it turned out absolutely differently. His appetite was unbelievable.” As oligarchs and allies from his St Petersburg days kowtowed to the new president, Mr Putin began to change. The inner circle of former KGB men from St Petersburg convinced Mr Putin it was time for the state to take back control of the economy, Mr Pugachev says. “After this takeover of power by the KGB I could not influence things any more. They had taken over like a tsunami.” Battle for influence For a long time, however, Mr Pugachev remained close to the president. “He was a very close friend of Putin,” says a senior Russian businessman. “He was in and out of the Kremlin as if it were his own home.” Mr Pugachev says he believed he had better chances of influencing policy to take a more progressive course if he stayed on the inside rather than in open opposition. But as Mr Putin’s silovik, or “tough guy,” colleagues from the KGB strengthened their grip, his relationship with the Russian leader began to falter. Mr Putin harboured a resentment of the man who had put him in power, Mr Pugachev suggests. “There was always this friction from the very beginning,” he says. While the rest of the Kremlin inner circle bowed to Mr Putin’s every word, Mr Pugachev spoke his mind. He was “a victim of his own tongue”, the Russian businessman says. Some observers in Moscow claim Mr Pugachev relied too much on his relationship with Mr Putin to win business favours. The empire he acquired following Mr Putin’s rise spanned Russia’s biggest shipyards in St Petersburg, a multi­billion­dollar coking coal producer in Siberia called EPK, and some of the capital’s most high­profile constructionprojects. But Mr Pugachev notes that Mezhprombank had been the country’s biggest private bank long before Mr Putin was president. “I never asked for anything in return,” he says. Pushed out of projects The first hint of trouble came in August 2008 when Alexei Kudrin, then the liberal leaning Russian finance minister and a long­time ally of Mr Pugachev, told him Mr Putin wanted to take back a project to develop a five­star hotel and residential complex on one of the city’s most prestigious sites, 5 Red Square. Mr Pugachev assented — as long as the price was right. But the project was seized without any compensation at all. Mr Pugachev’s attempts to file a suit for the Rbs3.6bn he had spent on the project and an estimated Rbs41bn in lost profits went nowhere. A spokesman for Mr Kudrin said the former minister would not comment on Mr Pugachev’s case.

The same thing happened a year later when Mr Putin told him he wanted to take the St Petersburg shipyards for the newly­created state shipbuilding corporation, OSK. First, Mr Pugachev claims, he was promised $5bn for the yards. But he received nothing. Then came a string of criminal charges over Mezhprombank’s bankruptcy. The central bank revoked its licence in October 2010 as it struggled to pay back $1.2bn in bailout loans. Mr Pugachev claims the bankruptcy was orchestrated so the state could take the shipyards, which were held as collateral for the loans, at a knockdown price. “People within the state manipulated the rules against him in order to bring the bank down, unsurprisingly benefiting themselves,” says Richard Hainsworth, former owner of Rusrating, a Moscow­based bank rating agency. Mr Pugachev says he is still struggling to understand why Mr Putin turned against him. The criminal charges were pressed in 2013, long after he left Russia and three years after the Mezhprombank bankruptcy. But after he settled in London Mr Pugachev sent a letter to Mr Putin in 2012 warning of legal action over the expropriation of his business. Mr Pugachev says he should have known time was running out. The late Russian Patriarch Alexei II, with whom he had forged a close friendship, warned him of the threat posed by Mr Putin and his KGB men. As the patriarch’s health began to fade in the autumn of 2008, “he told me he may not live, but that I would be a witness to how the Chekisty [members of the secret police] would destroy the country”, he says.

Lonely fight: Sergei Pugachev pictured above in London late last year and, below, with Vladimir Putin before the president began to move against him from 2008

Andrew Testa/New York Times/Eyevine; Reuters

Alzheimer’s breakthrough hopes add to promise of pharma revival Eli Lilly clinical trial yields positive signs Research advances end innovation drought ANDREW WARD — LONDON

Optimism for a breakthrough against Alzheimer’s disease has been boosted by encouraging clinical trial data from Eli Lilly, adding to perceptions of a broader renaissance in the pharmaceuticals industry. Positive signs yesterday from a trial of the US company’s solanezumab drug appeared to increase its chances of becoming the first treatment capable of slowing the pace of the memory­wasting condition. That hope follows recent advances against heart disease, cancer and hepatitis C as the industry recovers from the innovation drought that depressed growth in the past decade. European regulators this week approved the first significant new treatment for high cholesterol since statins in the 1990s and tomorrow are expected to make a recommendation on the first vaccine for malaria. These are part of a rising tide of new drug approvals in the past two years that has helped restore faith in the industry’s ability to innovate after it lost patent protection for many of its best­selling older medicines. “We are seeing new technologies that are enabling us to target disease like we never have before,” Joe Jimenez, chief executive of Novartis, the biggest European pharmaceuticals group by market capitalisation, told the Financial Times yesterday. The Swiss group this month won approval for a new heart drug, called Entresto, tipped by analysts for up to $11bn in annual sales. This optimism is reflected in the 40 per cent rise in the S&P pharmaceuticals index over the past year, compared with a 7 per cent lift in the broader S&P 500. However, sceptics warn that the industry still faces big challenges from the high cost of developing drugs and pressure on prices as health systems around the world struggle to cope with rising demand from ageing populations. Eli Lilly hopes its solanezumab drug, by allowing patients to remain independent for longer, can help ease the cost of Alzheimer’s on society while delivering a multibillion­ dollar windfall for the company. Analysts warned that the drug’s fate would remain in the balance until the results from a further big clinical trial are reported late next year; many previous Alzheimer’s studies have failed at that stage, causing heavy financial losses. But new analysis yesterday of a previous trial of more than 1,000 people with mild Alzheimer’s reinforced earlier signs that solanezumab might provide a lasting reduction of about 34 per cent in the pace of mental decline. “The results provide encouraging evidence that solanezumab could indeed be acting on the disease processes that drive Alzheimer’s,” said Eric Karran, research director at Alzheimer’s Research UK, a charity. Other signs of renewed pharma innovation include the approval by the European Commission this week of Amgen’s Repatha drug, which was shown in clinical trials to reduce “bad cholesterol” by more than 55 per cent in people who failed to respond to statins. A similar product called Praluent from Sanofi of France and Regeneron of the US is likely to be approved by the US Food and Drug Administration tomorrow, igniting a battle with Amgen for what is expected to be a multibillion­dollar market. European regulators are also expected to rule this week on GlaxoSmithKline’s Mosquirix malaria vaccine, which has been in development for 30 years. Lex page 12  

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