The deal that made a Russian oligarchNick Kochan reveals how Roman Abramovich became a member of Moscow's elite - so rich that he bought Chelsea with small change

o   The Observer, Sunday 6 July 2003

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On 17 February 2000 Roman Abramovich attended a meeting in Moscow that would transform his business portfolio and send a man already seriously rich into the league of the Russian super-rich. Those attending were the power moguls of Russia's aluminium industry.

On one side of the table was Oleg Deripaska and Lev Chernoi, and on the other Roman Abramovich and Iskander Makhmudov. These players had a long history of being at each others' throats; now Abramovich offered them an opportunity to make peace.

At issue were not merely the prospects for Russia's aluminium industry, but the physical security of all the industry's managers and owners. For this was a sector riven by internecine war.

Abramovich came to the meeting with a straightforward proposal. He wanted to be the driving force in the consolidation of Russia's aluminium industry. He had the resources of the state-owned oil company Sibneft, which he had controlled for four years, to do it. He also had the imprimatur of the newly appointed prime minister, Vladimir Putin. Putin would not be elected president for another three months.

Abramovich was facing the two most powerful men in Russian aluminium. Deripaska controlled the massive Siberian Aluminum. Lev Chernoi, together with his brother Mikhail, owned Trans World, which owned Krasnoyarsk Aluminium and Bratsk Aluminium.

Should Russia continue fighting the aluminium wars or could the industry bury the hatchet and create a world leader in the industry, Abramovich asked these business leaders. The outcome of the meeting was a mega-deal, the like of which Russia had not seen before. It resulted in the creation of Russian Aluminium, a national champion that would become Russia's largest and the world's third-largest aluminium company.

Deripaska, just 32 at the time, was appointed to run the company as its general manager, while Abramovich and his Sibneft oil major would be a sizable shareholder.

Following the merger, the Russian newspaper Novaya Gazeta claimed, in an article headlined 'A country for two', that Abramovich and Alexander Mamut (head of MDM Bank, a key lender to Russian Aluminium) could soon control 50 per cent of Russian industry. It also observed that the 'primitive gangster capitalism' that developed in the wake of the USSR's collapse was giving way to a new 'monopolism'.

Such has been the success of Abramovich's cornering of the market that Russian Aluminium and its rival Siberian Urals Aluminium Company together own some 90 per cent of the massive Russian aluminium industry.

Until Abramovich entered aluminium, he was known as a wealthy oil trader who had made a clever deal with his mentor, Boris Berezovsky. Berezovsky had arranged for a consortium of Russian interests to buy a stake in Sibneft at the point when Russia was at its knees and capital was desperately needed. This was 1995, when the business community feared the defeat of Yeltsin and the return of Communism.

The two men had stumped up $100 million and took a massive gamble. This paid off when Yeltsin was re-elected, and Sibneft turned from a laggard to a leader, with a $2 billion valuation. Abramovich's wealth was assured. But his partnership with Berezovsky did not survive Abramovich's rise to power, and the two men, at one time close friends, are not now on speaking terms.

Friends of Berezovsky recall that Abramovich likes a challenge more than vast wealth. They say his decision to serve as governor in the remote province of Chuchotka was such a challenge. They say his involvement with Chelsea will likewise be a challenge. But he can have faced no greater challenge in his professional career than when he took on Russia's aluminium industry.

At the point when Abramovich stepped in, in early 2000, the Russian aluminium industry was in desperate need of someone to restore a sense of order. Violence and financial abuse had been rife since the early Nineties.

In 1993, an industry leader, Mikhail Turushev, was beaten up after firing an associate for 'tolling' fraud involving a French company called Trans Commodities. Lev and Mikhail Chernoi were employees of Trans Commodities and left shortly afterwards to become involved in Trans World. TW would be a key player in the aluminium industry for another seven years until Abramovich bought it out.

Tolling was a tax evasion ploy widespread in the Russian aluminium industry. Onshore firms set up offshore companies to buy their goods at artificially low prices. The offshore company sold the goods on at market prices and booked the profits in the low-tax haven. President Yeltsin was thought to turn a blind eye to the technique when used by his business cronies.

TW was a trading company owned at the time by the Chernois and the wealthy Reuben brothers, who subsequently sold their Russian interests. The group owned a web of more than 100 trading companies and banks. At its height, in 1997, it had sales of $6bn and produced half of Russia's aluminium and a fifth of its steel. It was heavily criticised by the Russian authorities, who viewed the system as a leech on the nation's economy.

As the battle heated up for private sector control of the state-owned industry, the murder rate increased. It is estimated that some 100 aluminium executives were murdered during the Nineties.

In December 1996, Swiss police arrested Mikhail Chernoi, suspecting him of being in contact with 'Taiwanchik', a Russian mafioso. It was reported that the Swiss sought information from the Russian Interior Ministry, which was believed to want to question Chernoi about false payment orders. But the Russians refused to provide information and Chernoi was released.

But scandal continued to haunt the Chernois. In 1998, the World Bank commissioned a report which investigated the advisability of lending money to a Russian bank involved with TW. The report concluded that Marc Rich, the commodity trader and US fugitive pardoned by ex-US President Clinton, had given seed capital to TW.

Trans World was investigated by police authorities in the UK, Germany and Switzerland during 2000 - when Abramovich owned the company - for the alleged laundering of $7bn before he took control.

The investigation was prompted by a report to the police authorities by German bank WestLB, concerned about suspicious deposits by some of its clients including TW.

Swiss authorities also investigated the Chernois, who now live in Israel. The German police, who confirmed the investigation, said that their efforts were stalled by Russian stonewalling of requests for information.

The police investigations in all three countries were closed, with no charges being brought.

'He won, Russia lost'Roman Abramovich, Britain's richest man, has lavished millions and millions upon Chelsea Football Club. Adrian Levy and Cathy Scott-Clark track down the workers in the oilfields of Siberia who make it possible

o   Adrian Levy and Cathy Scott-Clark

The Guardian, Saturday 8 May 2004

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Cutting through the ice-crystal air, a warning bell tolls and the drillmaster hollers, his body swaddled in wool, fleece and fur to protect him from temperatures that have slumped to minus 40C. "Re-engage," he shouts into the dead calm of the frozen Siberian tundra as five members of the oil rig crew, wrestling with grappling hooks, attempt to steady a 50m-long pipe that thrashes above our heads.

"Keep that steady," the drillmaster bellows, as his men are dragged across the platform by the writhing pipe, their heavy felt boots losing grip on the frozen steel of the burovaya, or screw-drill oil rig. There are 180 hours of labour ahead before these workers return home to Belarus, a three-day journey south-west. "Concentrate." One

momentary lapse and we could all be crushed by the hundreds of tons of steel suspended above us. Even if we could ring for help, how long would it take to reach us on the edge of nowhere, 600 miles south of the Arctic Circle, in what Maxim Gorky called "the land of chains and ice"?

Finally, the bucking pipe is gripped by the mechanical jaws of a massive clamp. Steel teeth engage, screeching and sparking, screwing the pipe into another that connects, segment by segment, two miles into the earth, down to the hardened bite of a screw drill that is grinding and sucking away at vast subterranean reserves of crude, black Siberian oil. Three thousand miles and five time zones away, in the directors' box at Stamford Bridge, south-west London, a photographer snaps a group of young businessmen in a moment of jubilation as Chelsea score.

On the right of the frame is Eugene Shvidler, the president of Sibneft, the Russian oil company that owns the burovaya in western Siberia and 9,999 more oil rigs like it. Shvidler, his arms thrown up in joy, is now a board member of Chelsea Village, thanks to an old friend standing to the left, punching a fist in the air. Britain's richest man, Roman Abramovich, aged 37, last year famously bought and restocked Chelsea for £250m; coins in his pockets compared with the dividends paid him by Sibneft, Russia's fastest growing energy company, of which he and Shvidler are core shareholders. Cheering beside them are other senior Sibneft executives, Chelsea Village board members and representatives of Millhouse Capital, a publicity-shy company registered in Weybridge, Surrey, that marshals Abramovich and his partners' interests in some of Russia's most valuable former state enterprises.

On the formation of Millhouse Capital in 2001, Abramovich's lucrative Sibneft assets sat beside his stakes in Russia's national airline Aeroflot (26%), the world's number two aluminium producer RusAl (50%), Russia's second largest automaker GAZ, the Orsk-Khalilovsky Metal Combine, Avtobank, insurance giant Ingosstrakh, a hydroelectric plant in Kraznoyarsk and the Ust Ilinsky pulp and paper plant. It is these investments, among others, that have made Abramovich the 22nd richest man in the world, worth an estimated £7.5bn, according to the Sunday Times Rich List. (As an aid to visualising the scale of this fortune, it is worth noting that in March banking giant HSBC reported its annual pre-tax profit to be £7.8bn, thereby smashing all previous British records.)

No wonder the men photographed at the Chelsea match are cheering: Russian lads, from humdrum Soviet backgrounds, millionaires many times over by their mid-30s, now standing in the directors' box, in a stadium they own, watching their team charging up the English Premier League - and all because of the breakneck race in the 1990s to create a western-style democracy and free market for Russia.

From the moment in July 2003 when news broke that a man almost unknown in Britain had snapped up debt-laden Chelsea, the British public were intrigued by Roman Abramovich. It was quickly established that he was a member of the Mayfair club Annabel's, bringing him into contact with the Rothschilds, Prince Michael of Kent and other influential aristocrats. Abramovich had spent a reported £12m on a 450-acre estate at Fyning Hill, West Sussex, for Irina, his wife, and their five children. He was rumoured to have put Arkady and Ilya, his two sons, down for Eton.

His unofficial publicity machine provided a few Dostoevskian scenes: his mother died when he was 18 months old; his father was killed in a construction accident; the orphan Roman was raised by an uncle in Komi, a Siberian province that was formerly a hub for the Stalinist gulags. However, by 1996, at the age of 30, Abramovich had become so rich and politically well-connected that he had become close to President Boris Yeltsin, and had moved into an apartment in the Kremlin at the invitation of the Yeltsin family. In 1999, and now a tycoon, Abramovich was elected governor of Russia's remote, far eastern province of Chukotka, and has since lavished £112m on charity to rebuild the impoverished region. The identikit image being pieced together for us was of a self-made man who was not only powerful and wealthy, but acutely aware of those who had done less well in the tumultuous 1990s, when the Soviet Union fell.

In fact, little of substance is known about Abramovich's wealth other than that he is one of 23 Russian entrepreneurs who took advantage of the privatisation of Russia's state assets in the mid-1990s. This exclusive group now controls 60% of the Russian economy, and their combined wealth amounts to £44.6bn. Abramovich is the protege of Boris Berezovsky, a maths professor turned car dealership tycoon, who helped him secure a hold over Sibneft in 1995 - until Berezovsky fled to Britain in 2000. Russia's richest oligarch, Mikhail Khodorkovsky, a majority shareholder in Yukos oil, struck a merger deal with Abramovich last year - although it is now in the hands of lawyers after Khodorkovsky was jailed pending trial on fraud and tax evasion charges.

Sharing the same social circle is Ralif Safin, who controls a £300m stake in Russian energy giant Lukoil and who last summer was linked to a bid to buy Manchester United. Oleg Deripaska, Abramovich's shareholding partner in RusAl, is said to be worth £820m, while Mikhail Fridman, another of Abramovich's competitors, has recently made himself even richer by selling 50% of Tyumen Oil to BP for £3.72bn. But how did Abramovich make so much money in such a short amount of time? How did one man come to control a reported £5.3bn stake in Sibneft, a state energy provider that only 10 years ago was bequeathed to Russia's citizens, predominantly the tens of thousands of Soviet oil workers and managers who built the industry?

Abramovich is notoriously coy, and has talked only in the vaguest terms about the source of his wealth. That is why we have come here, to the crow's nest of an ice-encrusted burovaya out on the western Siberian tundra, the start of Abramovich's cash pipeline, to ask his workers how they lost their share in Russia's oil billions.

And now that the team from Belarus has reconnected the pipe above our heads, we can feel a pulsing as the rig comes back to life. The arrows on the LED flow-meter begin to flutter. Oil gushes freely once again: six barrels filled every minute, 375 an hour, 9,000 a day from this rig alone, grossing £150,000 every 24 hours for Abramovich's Sibneft, which in the first half of 2003 posted a net profit of £770m, an increase of 190% on the previous year.

To reach the Sibneft wells, you have to travel a circuitous route. It is not just a question of geography and meteorology - time zones, thousands of miles and a subarctic crust of ice. Nor that it is an autonomous region, physically and politically distant from Moscow. The oilfields of western Siberia generate one quarter of Russia's wealth, nine million barrels a day - equivalent to £166m - making this a

hugely sensitive region. Foreigners can visit only at the invitation of Sibneft or one of its competitors.

In a windowless conference room in Moscow, within a shout of the Kremlin, we meet Abramovich's sharp-suited spokesman. John A Mann II is no ordinary public relations executive, but a veteran spin doctor from the cauldron of Washington DC, and former vice-president of US PR giant Burson-Marsteller, the company that represents Ford and Coca-Cola, and has in the past acted for Union Carbide following the 1984 Bhopal disaster in India and the Exxon oil company after the Exxon Valdez oil spill. Mann bowls first: "All that stuff about Roman [pronounced Ro-man] buying up half of London, even Bernie Ecclestone's place, is complete rubbish." He rocks back in his chair. "People talk of Roman like he is some kind of mafioso, but he is only displaying the kind of nous that businessmen champion in the City of London."

Mann leans over. "Roman doesn't even let me tell half the good stuff. This weekend, he's spiriting a bunch of poor Russian kids to London to catch a performance of Mamma Mia. What a PR opportunity, and I have to sit on it. Roman's changed the lives of 70,000 people in his province, Chukotka. They used to be starving and now they all have Dolby Surround Sound. Do you think they're complaining? But for Roman it's not an ego thing."

How did Abramovich come to control Sibneft, we ask. "We don't write anything about the old days. That's prehistory. If you read our website, you'll see it was just a question of timely investment and share consolidation." Why do fewer than 4% of Sibneft employees own shares in the company? Mann is dismissive: "Roman is just one of our shareholders. We have thousands of them, including many employees, and we pay all of them dividends every year. I don't think we have ever said how much Roman personally holds. There's no requirement in Russia to reveal to you our share register."

Can we talk to Abramovich directly (something we have been requesting now for four weeks)? Mann chuckles: "I think you just missed him. He flew to London this morning with some more poor kids from Chukotka. Anyhow, it's a quiet time right now. No interviews. No headlines." Abramovich is lying low. Can we go to the western Siberian oil wells and meet Sibneft's workers? Mann nods. "If you can get yourself to Noyabrsk, our town, we will arrange a permit. We're really open, not like other companies." Within days, we are flying east over the Ural mountains and north-west across the great Ob river towards the Barents Sea.

For three hours, the landscape below barely changes: a frozen cat's cradle of tracks leading to isolated communities we cannot see. From the air, the dormitory town of Noyabrsk is a tiny, ice-white blip that is permanently covered in hoarfrost. We step off the plane and are hit by the juggernaut of an arctic wind. A shiny new Sibneft people carrier is waiting for us, purring in the airport car park. Beside it are two Sibneft employees in black fur shapkas holding a sign: "The Guardian." The gloves come off. We shake hands. "Welcome to our town," the Sibneft men chorus as ice crystals clog our nostrils.

Outside the airport stands a Soviet-style concrete obelisk on which an oil worker wields a raised spanner. But Noyabrsk's old Soviet aura vanishes as soon as you

breach the city limits. Posters wrap up the entire town in Sibneft's corporate messages, directed at visiting investors and the company's employees, who make up one third of the 107,000-strong population. Giant photographs of Arcadian scenes are draped across concrete apartment blocks. Bees feed from purple thistles. A robin perches on a violet hollyhock. A butterfly sips nectar among chrysanthemums. But the splashes of colour sit oddly alongside the monochrome, igloo gloom of Noyabrsk, where the cold muffles every sound apart from the creaking ice. What is it like working for Abramovich, we ask our minders? "Well, he's never been here," one of them says dismissively. "I thought you wanted to meet the workers," the other snaps. "Let's go then."

Two hours later, we skid up to a state-of-the-art complex 70 miles north of Noyabrsk. Shimmering aluminium pipes lead to a golden flare. With the assistance of international oil contractors, including Halliburton, Sibneft has begun to modernise a belching Soviet industry. We leave the people carrier, and by the time we reach rig five we can no longer feel our hands and feet. A maintenance brigade dressed in voluminous salopettes, Arctic mittens and balaclavas is repairing the rig, a geyser of steam and water shooting up into the air as they pull sections of pipe out of the ground. "Can we come up?" we shout to the rigmaster.

"Where have you people come from?" he calls back. "London! There's never been a British person here before. Climb on up." Our minders are not invited and plod back to the people carrier looking worried. Vladimir Ramazanov, 43, from the Siberian town of Nizhnevartovsk, is the head of the maintenance brigade and works out here at -35C for 12 hours a day, 15 days on and 15 days off. He says, "It's a nine-hour bus ride home, but I keep coming back. I have been drilling for oil for 18 years and can't do anything else. Anyhow, why are we freezing our balls off out here? I'm going to make some tea."

Ramazanov slides off the platform and leads us to a fatigued and rusty block of heated wagons, whose lacy curtains add an incongruous hint of domesticity. He pulls off his felt snow boots and settles on to a stool, grinning at us in disbelief with rows of golden teeth. Do Ramazanov and any of his 18-man crew own any shares in the oil industry, we ask. He explodes in a fit of choked laughter and lights a cigarette. "We earn now less than we did in Soviet times. We do earn more than many Russians, the fifth highest wage earners, but I doubt that any of us still hold shares." This is not the way it was supposed to be.

On Christmas Day 1991, President Mikhail Gorbachev announced his resignation and the end of the USSR. A group of economic reformers protected by Yeltsin, who had been elected president the previous June, began a course of shock therapy, dismantling the centralised economy. On January 2 1992, prices of all goods and services were freed, and six months later laws were passed heralding the immediate privatisation of 80% of state enterprises, from pencil factories to oil refineries.

On August 20 1992, as the privatisations unfurled, Yeltsin announced that Russia was about to become a stakeholding society. Every citizen was to be issued with a voucher worth 10,000 roubles (then worth about £30, the equivalent of an average monthly wage) that they could exchange for shares in the companies that employed them or in any other former state enterprise. The vouchers could also be invested in savings

schemes. To ensure a fair distribution of wealth, shares in each newly privatised company would be divided into three tranches, one set aside for the 57 million workers and managers, another solely for outside investors, and the remaining controlling interest retained by the state. There would be "millions of owners rather than a handful of millionaires", Yeltsin pledged. "Everyone will have equal opportunities in this new undertaking and the rest will depend on ourselves... The privatisation voucher is a ticket for each of us to a free economy."

Rigmaster Ramazanov slurps his tea. "We didn't understand the concept of owning shares, and there wasn't even a Russian word for 'privatisation'. More educated people took the opportunity." While most Russians grappled with what to do with their vouchers, Roman Abramovich relished the challenge set down by Moscow. By 1992, the 25-year-old was already familiar with the notion of a free market, having taken advantage of the legalisation of private businesses introduced by Gorbachev in 1987 to set up an oil trading company. For five years, he had bought cheap Russian oil for a few roubles a barrel and sold it abroad for a considerable profit. Now Abramovich allegedly bought up blocks of vouchers from oil workers, converting them into shares in western Siberian energy companies - there was nothing to stop him, it was perfectly legal.

The impoverishment of Russia helped Abramovich consolidate his holding. "After the prices were freed up in 1992," says Ramazanov, "everything went to hell." The rouble fell on the foreign exchange market from 230 per dollar in January 1992 to more than 3,500 by December 1994, wiping out most people's savings. The impact on the population was dramatic. Life expectancy for men fell from 65 in 1987 to 59 in 1993. The number of suicides rose by 53%, as more than one third of the population slipped below the poverty line.

In early 1994, stalls appeared in western Siberian towns such as Omsk and Noyabrsk offering cash in exchange for vouchers that were said by the agents to be worth no more than a handful of kopeks. Ramazanov says, "Of course people sold up." Many accused Boris Berezovsky and Abramovich of creating front companies to run these market stalls, an opportunistic rather than an illegal operation. Both men decline to comment on the allegation. Ramazanov continues: "If we had held on to our vouchers and exchanged them for shares, we would have made a lot of money. We hated President Yeltsin for allowing us to be ripped off by these New Russians."

Economists who devised the voucher scheme now concede that the trade in them could have been inhibited if one simple measure had been introduced. Sergei Vasiliev, a member of Yeltsin's economic reform team and today chairman of the Committee on Financial Markets in the Federal Assembly, the Russian parliament's upper house, told Weekend, "If we had issued savings books in each citizen's name that were non-transferable, speculators would not have been able to obtain large blocks of shares. But we couldn't afford to print 150 million savings books. One piece of paper, a voucher, was much cheaper."

In July 1994, a Mnenie poll for the Izvestiya newspaper revealed that only 8% of Russians had exchanged their vouchers for shares in the enterprises in which they worked. At that time, of the 18 men on rig five, seven invested their vouchers in fraudulent savings schemes, five sold them for cash and two had not even bothered to

pick them up. Only four had bought and held on to shares. Ramazanov drains his cup. "Below our feet is more oil than we could ever extract, and massive profits are to be had for decades to come. Me and my crew will have little to show for it. Don't take my word for it. Go and see how the guys did down the road."

We skittle along the frozen highway to the neighbouring rig where the Sibneft team from Belarus are mending a screw-drill rig. One hundred metres above the drifts, with the broken connection thrashing over our heads, we ask the drillmaster Valery Novik how he and his team had fared during the reforms. "The same as most," he says. "We didn't do well. We're not trained to understand shares and economics. The people who got an education invariably pulled one over on us. Anyhow, the New Russians were soon given a nice present by Yeltsin."

By 1995, the majority of Russians were worse off under capitalism then they had been during communism, and the party began to bounce back. Yeltsin would have to fight a persuasive and high-profile pro-democracy campaign if he was to win the presidential election of 1996. He was desperately in need of funds, and turned to men such as Abramovich and Berezovsky, whom he invited to participate in the so-called "loans for shares" scheme in return for financial backing. Yeltsin decreed that the government would auction its tranche of shares in state enterprises in return for loans to shore up the fragile economy. Once Yeltsin had been re-elected and the country stabilised, the loans would be repaid and the state would reclaim its assets.

In the oil town of Surgut, 250 miles south of Noyabrsk, on the day the government auctioned its stake in Surgutneftegas, the airport was closed, the roads blocked by police, and only one bid was received - from Vladimir Bogdanov, the resident general director of Surgutneftegas. He became a multimillionaire overnight, and today is worth an estimated £1bn and remains the company's president.

The following month, in November 1995, Vladimir Potanin, an influential banker, snapped up Norilsk Nickel, Russia's largest nickel company, for £78m less than the government's asking price. Within months, he had become first deputy prime minister, and today, although he no longer holds political office, he is, according to Forbes magazine, worth getting on for $2bn.

Next up was Yukos, Russia's third largest oil company, which was sold for £173m (a fraction of its real value) to sole-bidder Mikhail Khodorkovsky, a member of parliament in the Russian duma. Not only had 32-year-old Khodorkovsky helped draft the "loans for shares" legislation, but his Menatep bank (which had become wealthy by trading vouchers) also policed the auction. Today, Khodorkovsky is the richest man in Russia, worth an estimated £8.4bn, his portfolio encompassing 40 former Soviet enterprises. But the true scale of Khodorkovsky's bargain-basement purchase of Yukos became clear only in October 2003 when, following his arrest, Russian prosecutors froze 44% of the company's assets, revealing that they were worth more than £7bn.

And then, in December 1995, four oil exploration, drilling, refining and distribution companies in Noyabrsk and Omsk came up for auction, in a deal that would see them combined into a holding company to be named Sibneft. A confidential financial analysis by a leading Russian brokerage firm, seen by Weekend, along with a

deposition made by a state parliamentarian last October to the Russian prosecutor general, allege that the Sibneft "loans for shares" auction was rigged. Yeltsin authorised Neftyanaya Finansovaya Kompanya (NFK), a company closely linked to Kremlin insider Boris Berezovsky, to manage the auction of 51% of Sibneft. But despite the winning highest bid having come from Uneximbank, which offered approximately £230m for 51% of Sibneft, Russian critics were amazed to see Finansovaya Neftyanaya Kompanya (FNK), a barely disguised relation of NFK, the company that had managed the sale, winning the Sibneft shares with a lower bid of £117m for assets valued at £337m. A legal action against FNK was launched and then abandoned, after Uneximbank inexplicably withdrew its complaint.

FNK was then revealed to have been another Berezovsky affiliate company that was also connected to his new partner, a 29-year-old oil trader called Roman Abramovich. Sibneft spokesman Mann says: "FNK won an auction to purchase 51% of Sibneft. The other 49% was privatised during a series of competitive auctions beginning in January 1996."

Yeltsin won the presidential election, financed by a private war chest of £140m in donations made by the new oligarchs. Two years later, FNK was allowed to keep its 51% share in Sibneft after the government announced it would not be repaying its loans. Abramovich and Berezovsky now owned a controlling share in an oil company whose reserves of more than four billion barrels were equivalent to those of Texaco, Chevron and Mobil. By comparison, the average oil worker's wage was £1.90 an hour, making an 18-man crew worth £75,000 a year, the sum of their combined salaries.

Drillmaster Valery Novik rolls his eyes and says, "We are too busy running these rigs, working back-to-back shifts, seven days a week, to worry about what the bosses get up to." Abramovich and Berezovsky now began to consolidate control over their share in Russia's former state enterprises.

Noyabrsk is sheltering under a thunderous snow sky. Vicious flurries that Russians call bozyomkas slice down the streets, sweeping a lone dog off its feet. The town is deserted because no one wants to battle with the weather on these kind of mean days.

Another Sibneft minder sits with us in the people carrier taking us to the satellite town of Muravlenko, three and a half hours to the north-west. No one talks as the driver nips in between brutal articulated lorries that hurtle along the iced highway.

"You're only here because Roman Abramovich is richer than your Queen," the minder pipes up at last. "I read it in our newspaper." We laugh, but the minder becomes distracted by a giant poster of an oil worker that flashes past the window. "The man you are about to meet," he says, pointing, "one of Sibneft's most productive employees."

Muravlenko is rougher around the edges than Noyabrsk. On the fifth floor of a wooden-clad apartment block, Vladimir Sterhov invites us in. His face has a beaten-up quality, quite different from the youthful image of him on the billboard. Gulnara, his wife, beckons us into their kitchen with a bottle of honey whisky made by her in-laws in Bashkortostan.

For five minutes, we politely discuss Sterhov's embarrassment at seeing his face on an advertising hoarding. But when we ask if he has any Sibneft shares, Sterhov becomes agitated. "I have no shares in anything. Tell me, will anyone censor what you write? If not, I have nothing to lose by telling you the truth. There is a saying that there is no exile further than the north, and I am already here for life."

The Sibneft minder shrugs his shoulders and Sterhov continues. "After Abramovich won the 'loans for shares' auction in 1995, we became Sibneft employees and the company stopped our wages for two, three, four months at a time."

The Sibneft minder nods vigorously. "It's true. That's right," he says. "Our wages were held back." Sterhov continues: "Sibneft said it couldn't afford to pay us. The country was heading for another financial crisis, and by August 1998, when the economy collapsed for the second time, people here were desperate. Then Sibneft started saying that although it couldn't pay our wages, it would buy any shares left over from the privatisations of 1992."

Company shops sprang up in Noyabrsk and Muravlenko, where the Sibneft shares were accepted instead of money. "Food, fridges, anything," says Sterhov - a claim that would be repeated by many Sibneft employees we interviewed in Muravlenko and Noyabrsk. This was not the only way that Sibneft ended up with the bulk of the shares. An account of Sibneft's complex financial manoeuvrings, produced by Russian analysts and seen by Weekend, confirms that in August 1997 Sibneft issued 45 million new shares in one of its most profitable subsidiary companies.

Core shareholders such as Abramovich and his partners were able to increase their stake in this subsidiary from 61% to 78% in this closed share issue. As a result, the shares belonging to workers who had bought into the subsidiary in 1992 were watered down and significantly dropped in value. The Sibneft workers launched a futile legal action while the £168m in extra revenue raised by the share issue was used by Sibneft to settle tax liabilities.

Christopher Granville, chief strategist of United Financial Group, a brokerage in London, told us, "Sibneft's minority shareholders were completely ripped off. The new shares were a closed subscription offered only to core shareholders." The Sibneft minder sitting beside us chips in. "My shares plummeted in value, along with everyone else's, when the 1997 closed share issue was announced."

Lord Richard Layard, co-director of the Centre for Economic Performance at the LSE and an economic adviser to the Yeltsin government, said that this strategy was possible due to loopholes in company law. "Most Russian companies did not issue share certificates. The only proof of ownership was a shareholders' registry, quite often a handwritten book that was held by the company.

In some cases, the records of a shareholder's ownership were simply crossed off this list. In other cases, firms issued new shares, free to some of their shareholders, without informing the others."Mann responds for Sibneft: "Any registrar system based on people, pen and paper is open to human error but Sibneft has never had a policy of crossing shareholders off its registry."

By 1999, Sibneft's most productive worker, Vladimir Sterhov, was struggling to feed his family on a monthly salary that sometimes dipped as low as £112. Abramovich and his core shareholders had bought out Berezovsky, and through a new series of auctions won control of 97.2% of Sibneft.

The following year, the company began paying dividends that broke all Russian corporate records: £28m in 2000; £552m in 2001; £612m in 2002; and £696m last year, of which £640m went to Abramovich and his fellow core shareholders (who by now included Eugene Shvidler and Kenneth Dart, a carpetbagging Styrofoam cup billionaire and resident of the Cayman Islands).

Vladimir Sterhov takes a sip of honey whisky: "In Russia, a lot has changed. We workers are now the small people and we do not matter." Sergei Rusakov, Sibneft's chief engineer and deputy director of regional operations in Noyabrsk, denied that his employees had been ripped off: "I've been here from the beginning and I bought shares in 1992. I'm still a minority shareholder and I do very well. I don't dispute that a lot of employees no longer have shares. But it's not in a Russian's character to dwell on what has been lost. Those who sold their shares or vouchers didn't lose out completely. They bought apartments and cars and fridges, and at the time they did this they thought they had a good deal." None of them, however, owns football clubs, country mansions or multimillion-pound yachts moored on the C¿te d'Azur.

No one in Noyabrsk will say that it was better in the old days. Remarkable things were achieved in Russia during the transformation period. More than 106,000 state enterprises were privatised in two years. But the free market has cost the average citizen dear. While there are 23 resident billionaires in Moscow - a figure topped only by New York, with 31 - Russia's per capita gross domestic product is now less than that of Costa Rica. This may simply be evidence of the acquisitive skills and greed of the new owners of Russia, but in a recent poll cited by the World Bank, 80% of respondents said that they believed the oligarchs had made their fortunes dishonestly.

Among the most embittered are the families who founded towns such as Noyabrsk. Mikhail Karpenko, who lives here in a small fourth-floor apartment with his wife and youngest daughter, says, "I arrived in 1974 when I was 20. I volunteered. Came here on a Komsomol ticket, in search of something new and patriotic." Komsomol was the Communist youth movement and Karpenko was part of the advance party of engineers and geologists sanctioned by the Supreme Soviet in Moscow to find oil and gas. "We wanted to help build a future for the Soviet Union."

In March 1980, while Abramovich was still at school in Komi, the Soviet government adopted Resolution 241, announcing "urgent steps to accelerate construction in the western Siberian oil and gas complex". Lubov Karpenko joined her husband to help build Noyabrsk out of sheet metal and timber. She hands us a well-thumbed photo album. "That's me," she says, pointing to a row of young female pioneers in knee-length leather boots and miniskirts. Mikhail says, "We were heroes of the USSR. We lived in a heated truck with one other family, a curtain dividing us. My daughter Nastya was the 60th child of Noyabrsk."

He produces a box of bronze and silver medals for Communist Labour and Labour Glory. "When the changes in Russia began, I embraced them. I bought shares in the

gas industry. I still have them. However, very few of my colleagues who bought shares in Sibneft still have them."

His cheeks colour. "Abramovich never spent his nights in the back of an oil fire-heated truck. He never assembled the rigs when a gusher was struck or helped carve out the rail tracks and roads that brought in more labour. But he did scoop up the shares of those too poor and uneducated to appreciate their potential value. He did hustle thousands more out of their stake in Russian oil as the economy collapsed around them. He won. Russia lost."

However, not everything is going Abramovich's way. Although Sibneft cancelled its merger deal with Yukos last October, Yukos refuses to let go and threatens to swallow up Sibneft or suffocate it in lengthy litigation. The Russian authorities have recently served Sibneft with two bills for unpaid tax totalling £797m.

New oil export duties set to take effect in August, combined with an oil extraction tax that will come into effect next January, will raise an extra £1.68bn in revenue for the state, while shaving 3% off Sibneft's earnings forecast for 2004.

Abramovich's acquisition of Sibneft is also under scrutiny. Last December, the audit chamber of the Kremlin announced that it would review all privatisations of the past decade. Included is a dossier of allegations presented to the Russian prosecutor general by Vladimir Yudin, deputy chairman of the State Duma's committee on economic policy and enterprise, who claims that 51% of Sibneft was sold off in a "fake auction" in 1995, the winner having been chosen in a "premeditated agreement".

There have been no findings yet, but President Putin has issued a warning to all of the oligarchs: "Those who were involved in deliberate fraud must not enjoy more favourable conditions than those who did the right thing and abided by the law."

Meanwhile, the new tycoon from the old bloc has been quietly securing his position in Britain. Buying Chelsea has internationalised Abramovich's reputation and he has also begun severing his business ties to Russia. In March 2003, he sold his shares in Aeroflot and in October off-loaded 25% of his stake in RusAl. Both Shell and Total are rumoured to be negotiating with Abramovich to buy a £2.5bn stake in Sibneft. Abramovich has already said that he will not stand again for the governorship of Chukotka.

Far out in the roadless tundra stands a wigwam, or chum, made of animal hides, a curl of smoke rising from its chimney. A snowmobile has towed us here, three of us sitting inside a tin sledge, to meet the original inhabitants of the western Siberian oilfields. We are 100 miles north-west of Noyabrsk but, with its icicle-white reindeer and forests of birch trees, it feels as if we have travelled back in time and into a Russian fairytale. The kettle is on, Nadezhda says, inviting us inside her chum.

As the ice for tea melts, Nadezhda's son Pyotr tells us how their ancestors from the Nenet tribe had herded reindeer across these snow plains for the past thousand years. "Can I ask a question?" he says. "Sibneft people came. They are paying us 14,000 roubles [£280] a year in compensation for the damage done to our land. A share in their profit. Is it a good deal?"

Nadezhda frowns. "The trees are dying. In the summer, the fish float up dead in the river. The reindeer are sick." The ice fizzles in the teapot. "Once, we thought our world was so large. You could ski for miles and never see a chum. Now, the oil rig flares are getting nearer and Sibneft tells us we have to move." The sun dips, turning the Siberian tundra blue. The only things that can be seen on the horizon, apart from a net of gleaming stars, are orange ribbons of fire spurting out from the Sibneft wells that are strung across the frozen desert like pennants of profit.

The Sibneft perspective

John Mann II, spokesman for Abramovich and Sibneft, said: 'It is very important that you understand the distinction between Roman Ambramovich, shareholder, and Sibneft the company. Mr Abramovich held positions in the company only in 1996-1997, when he was head of the Moscow representative office and a board member. Furthermore, while he is now among our largest shareholders, he is not the only one. Everything Sibneft is not everything Abramovich (and vice versa). The company has its own management team.'

In response to questions about the withholding of salaries by Sibneft and the establishment of share shops, Sibneft responded: 'In the upheaval of the mid-1990s, you were lucky to go only two to three months between pay cheques at any major industrial enterprise in Russia, so it would be inaccurate to make a correlation between pay deals and privatisation.'

When Roman Abramovich invested in Highland Gold, a London-listed Russian gold miner this week the interesting thing was not the deal’s size. A man who is estimated by Forbes to be worth $18.7bn, and is the owner of Chelsea Football Club, a Boeing 767 and several luxury yachts can do $400m deals before breakfast. The surprise was that it happened at all.

Only two years ago, Russia’s richest man seemed ready to quit his homeland. He had sold his 73 per cent stake in Sibneft, the oil company that made his fortune, to state gas giant Gazprom for $13bn. While it was an eye-catching price for something Mr Abramovich and Boris Berezovsky, then his partner, had bought for less than $250m a decade earlier, there were rumours the sale was not entirely voluntary.

Mr Abramovich had already sold stakes in ORT television, Aeroflot and Rusal, now the world’s biggest aluminium producer. Only his governorship of the remote Arctic region of Chukotka still tied him to Russia.

The climate had turned chilly for men like Mr Abramovich, as President Vladimir Putin had arrived determined to restore the Kremlin’s power over the “oligarchs” – 1990s tycoons who had parlayed their wealth into political influence. Mr Berezovsky and another tycoon, Vladimir Gusinsky, had already fled Russia after falling out with Mr Putin in 2000.

Mikhail Khodorkovsky, previously Russia’s richest man, whose Yukos oil company had been due to merge with Sibneft, had been jailed and his company in effect renationalised in a fraud and tax evasion case widely seen as Kremlin-instigated.

Unlike Mr Khodorkovsky, Mr Abramovich had played by Mr Putin’s new rules: stay out of politics to keep your gains. But Moscow scuttlebutt suggested his conspicuous affluence was an irritant for the Kremlin.

Yet within eight months, Mr Abramovich was back, taking a $3bn-plus investment in Evraz, a Russian steel company, which has gained 60 per cent since he bought it. This week’s Highland Gold investment confirms his re-found status as a Russian metals and mining magnate. The fact he made it two days after parliamentary elections in which Mr Putin had warned against a return to the 1990s oligarchy suggests he once again feels secure.

Mr Abramovich was, after all, part of that oligarchy. He prospered through the “loans for shares” scheme of 1995, when businessmen lent money to the administration of President Boris Yeltsin, receiving stakes in unprivatised corporate jewels as collateral. When the loans were not repaid, the tycoons were allowed to sell the stakes – usually to themselves. But unlike others such as Mr Berezovsky, who paraded their clout, Mr Abramovich shunned publicity. He still gives few interviews.

The stubbly figure with the shy grin was born in 1966 in Saratov on the Volga. He lost both parents by age four and was raised by maternal grandparents in Ukhta, a bleak northern oil town. In 1988, he started a Moscow business making plastic toys; then he traded oil on Moscow’s first commodity exchanges.

His breakthrough came in 1995 when he met Mr Berezovsky and, by some accounts, brought him the idea to carve out two prime assets from Rosneft, a state oil company, to create what would become Sibneft, which they then acquired together through loans-for-shares. Like other participants, Mr Abramovich has admitted the assets were sold at knockdown prices. But he says the hazards – above all, the prospect of a Communist return in elections – made few willing to take part.

Through Mr Berezovsky, Mr Abramovich also got a Kremlin entree and became a close friend of Mr Yeltsin’s daughter. Mr Abramovich has denied claims he became the “cashier” for the “family” of Yeltsin associates that dominated late-1990s politics. But he made valuable friends, including Mr Putin.

Alexander Temerko, a former Yukos vice-president, says Mr Abramovich’s most important characteristic is his ability to cut a deal. “He’s a very intuitive person who is able to agree so that everyone feels comfortable.” Indeed, Mr Abramovich tried to resolve Yukos’ problems with the authorities in 2004, offering to mediate a deal that would have seen his team take over running the company, Mr Temerko says, but a key shareholder opposed it.

A person who worked with Mr Abramovich and other oligarchs in the early 1990s says another skill is in identifying good people. “His talent has been to associate himself with people who are brighter than him and more astute,” this person says. “When he bought Chelsea he picked the best coach on the planet. He went straight for a guy and wrote the cheque.”

Mr Abramovich also made two shrewd decisions that set him apart from other oligarchs. He become governor of Chukotka, a region twice the size of Germany but with barely 50,000 inhabitants – so poor when he arrived in 2000 that some residents lived largely on whale blubber.

The motive may have been corporate tax breaks – Sibneft registered parts of its business there – potential mineral wealth or a politically astute desire to be seen to be putting something back. But John Mann, his spokesman, says that through Mr Abramovich’s income tax payments and donations, Sibneft’s taxes, and other corporate and federal investment he has attracted, “at least a couple of billion dollars” have flowed into transforming Chukotka.

The second decision was his 2004 purchase of Chelsea for £140m, seen by many in Russia as a kind of “insurance policy” against any attack by Russian authorities. The purchase massively increased his profile in Europe and propelled Chelsea into the elite tier of British soccer, as he assembled a squad of some of the best global players.

Soccer, however, has become more than a mere pastime. Despite two consecutive Premier League titles, he ruthlessly dispatched José Mourinho, Chelsea’s charismatic manager, this year amid rumours of a personality clash and the owner’s desire for his team to play in a more attractive style.

Mr Abramovich’s past may yet haunt him. This autumn, Moscow’s elite Rublyovskoye highway, route to work for influential Russians including Mr Putin, has been plastered with posters advertising a book by a muck-raking journalist exploring his 1990s links with Mr Berezovsky, now seen by the Kremlin as Russia’s public enemy number one.

But one associate plays down any danger. “There are 50 billionaires in this country, and three have had problems. They’re the exception, not the rule.”

Roman Abramovich, the owner of Chelsea Football Club, has admitted agreeing to pay billions of dollars for political favours and protection fees to get his hands on the former Soviet Union's mineral wealth.

The puzzle of how the penniless street trader rose to amass an £11.4 billion fortune is explained for the first time in his own words in court papers seen by The Times.

Mr Abramovich paid older oligarchs so that he could obtain a big share of Russia's oil and aluminium assets and to escape unscathed from the deadly post-communist carve-up. He famously emerged triumphant after the “aluminium wars”, in which more than 100 people believed to have been killed in gangland feuds over control of the lucrative smelters. He avoided the fate of a rival oligarch who annoyed the Kremlin and ended up being transported to jail in Siberia for ten years.

Mr Abramovich, 41, has been forced to tell his story because he is being sued for $4 billion by his mentor Boris Berezovsky, 62, a refugee in Britain, at the London Commercial Court. The exile claims that Mr Abramovich became an enforcer-type figure for Vladimir Putin, passing on alleged threats of confiscation - and the jailing of a friend - to pressure him into selling shares in former state assets cheaply. Mr Abramovich has retorted with a 53-page defence that accuses Mr Berezovsky and a Georgian oligarch of demanding huge sums for helping him to rise from obscurity.

The man from Georgia, Arkady “Badri” Patarkatsishvili, emerges as the key intermediary, passing messages between the former friends. Mr Patarkatsishvili was offered $500 million by Mr Abramovich, the defence papers admit, for protecting him in the aluminium wars.

The Georgian was found dead in the bedroom of his country house in Leatherhead, Surrey, five months ago. Tests showed that he had advanced heart disease. He was 52.

Mr Abramovich launches his defence with an icy riposte to his old pal. Mr Berezovsky's signed particulars of claim state that the football boss was formerly his “trusted friend and close business associate”. Mr Abramovich is loath to accept that there was any trust. “Save that it is admitted that the defendant and Mr Berezovsky were friends, no admissions are made,” he states.

Mr Abramovich's vast wealth is founded on the Siberian oil company Sibneft, which was privatised by President Yeltsin in 1995 in an auction that some experts suspect of having been rigged. The Chelsea owner now admits paying Mr Berezovsky, then nicknamed “Godfather of the Kremlin” because of his influence over President Yeltsin, to secure the oil business.

“Prior to the August 1995 decree, the defendant informed Mr Berezovsky that he wished to acquire a controlling interest in Sibneft on its creation,” the defence states. “In return for the defendant agreeing to provide Mr Berezovsky with funds he required in connection with the cash flow of [his TV company] ORT, Mr Berezovsky agreed he would use his personal and political influence to support the project and assist in the passage of the necessary legislative steps leading to the creation of Sibneft.”

The Chelsea owner's next target was the aluminium industry. After privatisation, smelter managers, metals traders and journalists were reported to have been killed as groups battled for control.

Mr Abramovich now admits that he owed his success to the late Georgian oligarch. “Mr Patarkatsishvili did ... provide assistance to the defendant in the defendant's acquisition of assets in the Russian aluminium industry,” he states.

The Georgian had a reputation as a go-between with organised crime. He was employed by a car business to ensure debt repayment and provide protection against gangsters, according to a former head of the Russian Presidential Security Service. Aleksandr Korzhakov is quoted in the book Godfather of the Kremlin saying: “Badri has an alias, like any gangster. In the criminal underworld he is known as "Badar".

Mr Berezovsky's legal action accuses Mr Abramovich of being “close to President Vladimir Putin”. In Mr Abramovich's first public declaration of his relationship with the former president, he states that he “has had, and continues to have, a good working relationship with Mr Putin”. He formally denies, however, that they were close.

Mr Berezovsky escaped Russia after criticising President Putin. Mr Abramovich says that Mr Berezovsky asked him to buy his interests in ORT for $150 million. “The defendant agreed to do so, although the amount increased to approximately $175 million, which was greater than the value of those interests.” No explanation is given why he paid so much over the odds.

Mr Abramovich discloses that there was a showdown at St Moritz airport in Switzerland in 2001 when Mr Patarkatsishvili asked him to pay $1.3 billion to Mr Berezovsky. “The defendant agreed to pay this amount on the basis that it would be the final request for payment by Mr Berezovsky and that he and Mr Patarkatsishvili would cease to associate themselves publicly with him and his business interests.” The payment was duly made.

Mr Abramovich was also willing to pay off Mr Patarkatsishvili. He states that he agreed to pay $585 million “by way of final payment”.

Mr Abramovich denies that he helped himself to Mr Berezovsky's interests in Sibneft and aluminium or that he threatened a friend of the exile. “It is denied that Mr Abramovich made or was party to the alleged explicit or implicit coercive threats or intimidation,” he states.

The exact identity of the individuals that make up the “core shareholders” has never beenpublicly disclosed. According to management, Roman Abramovich owns most of thestake, although he has been quoted as admitting to owning only 45% of the company.Roman Abramovich was an oil trader Previously Abramovich had kept a fairly low profilebefore he went into public life, first becoming an MP in 1999 and then later the same yeardropping out of the Russian Parliament to run successfully for Governor of Russia’s northeasternmost, permafrost-ridden region of Chukotka. Abramovich appears to be very wellconnected with the network of Russian political and business heavyweights and seems tobe one of the few people really close to the Yeltsin family who have retained a favourablerelationship with the Putin administration. Abramovich’s partner, Boris Berezovsky,however, has not returned to Russia in the last couple of years. Abramovich’s businessinterests continued to expand outside the oil sector under Putin. His most substantial newventure is Russian Aluminum – he holds a 50% interest – which controls about 70% ofRussian aluminium production. In 2001, Sibneft’s “core shareholders” interests were

incorporated into a UK-based holding company, Millhouse Capital, which is the owner ofthe controlling stake in Sibneft, the stake in Russian Aluminium and other ventures such asa minority stake in the Russian airline, Aeroflot. Roman Abramovich is not involved inSibneft’s day-to-day operations.Of the other members of Sibneft’s management, CEO Eugene Shvidler said he has a stake

in Sibneft, which should now have been transformed into a stake in Millhouse Capital.

Boris Berezovsky’s involvement in Sibneft remains obscure. He very recently claimedownership of “half of the company” in the Russian media, but Sibneft’s managementdenies that he owns any part of it at present. It is not known for certain whether he everowned a stake in Sibneft. We believe that the design of Millhouse Capital and its involvement in Sibneft account forsome distinct features of Sibneft’s strategy, such as high hurdle rates for return oninvestment and high dividend pay-out. We believe that this involvement should bepropitious for Sibneft minority investors as long as Millhouse Capital sticks to highstandards of corporate governance. Millhouse Capital pursues interests outside the oilindustry besides having its controlling stake in Sibneft. Returns in various sectors of theRussian transitional economy vary substantially and can be quite high, due to lack ofcompetition from providers of capital. A wider choice of investments available to MillhouseCapital relative to other Russian groups, which interests are limited to controlling stakes inthe Russian oil sector, makes Sibneft’s required return from investments morecompetitive. Due to lack of high-return projects Sibneft competitors tend to fall into thetrap of over-investing into various “strategic” hedges that may feature low ROCE. Thus,Millhouse Capital as a financial investor moves Sibneft strategic objectives closer in linewith those of minority shareholders and removes the conflict of interests between theportfolio investors, who seek to maximise return, and the strategic investors, who areinclined to capture capital in their industry. Russian dividend taxation is very forgiving,which facilitates return of value to shareholders from corporates in the form of dividends.

Sibneft has certainly made good use of this opportunity so far.