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The Wall Street Journal February 23, 2005 PAGE ONE In From the Cold A Friendship Forged in Spying Pays Dividends in Russia Today Top Dresdner Banker's Ties To Putin Go Back to Days When They Were Agents Recruiting During the '80s By GUY CHAZAN and DAVID CRAWFORD Staff Reporters of THE WALL STREET JOURNAL February 23, 2005; Page A1 As one of Russia's most influential foreign bankers, Matthias Warnig is in the limelight these days. Under his leadership, the Russian division of Germany's Dresdner Bank AG has become a top Moscow deal maker. This month, OAO Gazprom, the world's largest natural-gas concern, nominated him to its board. Less well-known is Mr. Warnig's past as an agent of East Germany's dreaded secret police, known as the Stasi, and his web of personal and professional ties to Russian President Vladimir Putin. According to Stasi documents reviewed by The Wall Street Journal, Mr. Warnig left the East German intelligence service in 1989 with the rank of major. During the 1980s, when Mr. Putin served in East Germany as a KGB agent, Mr. Warnig helped him recruit spies in the West, according to former colleagues of the two men. After the Soviet Union fell in 1991, the two once again joined forces, this time to promote the spread of capitalism. Mr. Warnig, fresh out of management training at Dresdner, was sent to open a new operation in St. Petersburg, Russia, where Mr. Putin worked in the mayor's office, drumming up foreign investment. The bank got involved in Mr. Putin's personal life, underwriting some trips to Germany. When Mr. Putin's wife suffered a car accident, Dresdner flew her to a German hospital. Neither Mr. Putin nor Mr. Warnig has been accused of improprieties in the awarding of the investment-banking contracts. Moreover, Dresdner's aid to the Putins doesn't appear to have violated any Russian laws. Still, the murky past shared by the two men underscores the shadowy interplay between businessmen and former intelligence operatives in today's Russia. Mr. Putin himself served more than 15 years in the KGB and later headed its successor, the FSB. Since taking over the Kremlin in 2000, he has presided over an unprecedented influx of ex-KGB men into the upper echelons of power -- men whose formative years were spent learning how to undermine the West's interests. Prominent among the ex-KGB officials who now pace the Kremlin's corridors are Defense Minister Sergei Ivanov, Interior Minister Rashid Nurgaliev and FSB chief Nikolai Patrushev, as well as the heads of Russia's arms-export, defense-procurement and drug-enforcement agencies. A close Putin aide and former KGB man, Viktor Ivanov, serves on the board of flagship airline OAO Aeroflot. A favorite parlor game in Russia is to divine which other senior officials and businessmen have suspicious gaps in their résumé that suggest a past with the intelligence services. This has coincided with rising worries in the West about Russia's direction under Mr. Putin. Since coming to power he has closed opposition media, abolished regional elections for governor and moved to dismantle oil giant OAO Yukos with a zeal that has aroused major concerns about Russia's investment climate. On Monday, U.S. President George W. Bush warned that Russia "must renew a commitment to democracy and the rule of law." He is scheduled to meet with Mr. Putin in Slovakia tomorrow. It isn't surprising that Mr. Putin would turn to veterans of the KGB and friendly intelligence services to get things done. In the eyes of many Russians, the agency's former operatives still have an aura of cool efficiency and patriotic self-sacrifice. Men who risked their lives as spies during the Cold War developed special bonds of loyalty that carry over into post-communist times. Mr. Putin has openly celebrated his KGB résumé. Former Stasi officials, by contrast, were often stigmatized in post-unification Germany because people saw them as representatives of a hated police state. East Germans believed that the Stasi spied on people in schools, at work and in church. A spokesman for Dresdner, which is now a unit of German insurer Allianz AG and Germany's third-largest bank, said Mr. Warnig's personnel file was examined last year after a query from The Wall Street Journal and no mention of the Stasi was found. "We don't plan any additional action," said the spokesman, Bernhard Blohm. "We have to protect our employee." Through a London-based spokesman for Dresdner's investment banking unit, Dresdner Kleinwort Wasserstein, or DrKW, Mr. Warnig declined to comment. Still, an official at DrKW acknowledges Mr. Warnig's past Stasi service was known within the unit. He added that press inquiries into the matter could endanger Mr. Warnig and his family. An Allianz spokesman referred questions to Dresdner and DrKW. A Kremlin spokesman, while confirming many aspects of this account, denied that Messrs. Warnig and Putin worked together as spies. He said they didn't meet until the early 1990s in St. Petersburg and that their relationship was "strictly business." Mr. Putin, he added, wouldn't be available for an interview. The story of the Putin-Warnig relationship has been pieced together from intelligence records and personal correspondence, as well as interviews with the two men's friends and colleagues. Stasi documents seized by citizen groups after the fall of the Berlin Wall indicate that Mr. Warnig, now 49 years old, joined the East German Intelligence Service in the 1970s. He quickly built up a reputation as a top recruiter of spies in West Germany, according to Frank Weigelt, who says he was Mr. Warnig's former supervisor and co-worker on important cases. "Warnig's genius was to use personal friendship, rather than ideology, as the motivation for cooperation," Mr. Weigelt said. He enlisted at least 20 agents in West Germany in the 1980s to steal military rocket and aircraft technology, according to Mr. Weigelt, who spoke in a series of interviews between November 2004 and February of this year. Today Mr. Weigelt answers phones and does back-office work in a small business in Berlin. In Dresden, Mr. Putin, a fluent German speaker, was also a recruiter, but for the KGB. Starting in 1985, Mr. Putin's job was to enlist potential undercover agents capable of operating without diplomatic support on enemy territory, according to Vladimir Usoltsev, a former KGB officer from Mr. Putin's unit, who says he shared a Dresden office with Mr. Putin between 1985 and 1987. Recruiting Operation According to Mr. Weigelt, Mr. Warnig was sent to Dresden in October 1989 -- a month before the Berlin Wall fell -- to cooperate informally with the KGB. The Soviet security agency was running an operation in the city to recruit key Stasi members, with an eye toward getting its hands on their West German spies. Klaus Zuchold, a former Stasi officer who says he was recruited by Mr. Putin to join the KGB, says he didn't know Mr. Warnig by name but recognized him in a Dresdner Bank photo presented to him by The Wall Street Journal. Mr. Zuchold says that Mr. Warnig was in one of several KGB cells Mr. Putin organized in Dresden. Mr. Warnig's cell, which Mr. Putin set up after the fall of the Berlin Wall, operated "under the guise of a business consultancy" but was actually recruiting agents for the KGB, Mr. Zuchold said. Each of the agents was urged to found his own business to fund his spy operations, according to Mr. Zuchold, who now runs a small security-guard firm. According to Stasi pension records, Mr. Warnig drew an agency salary of 25,680 East German marks in 1989, or roughly $3,000 at market exchange rates. Irene Pietsch, a German banker's wife who says she befriended Mr. Putin's wife, Lyudmila, in the early 1990s, says Russia's future first lady once commented that it was much easier to get on with East Germans than West Germans. In a conversation over coffee in Hamburg in 1996, Mrs. Putin cited Mr. Warnig as an example, Mrs. Pietsch says. "She said we all grew up in the same system, and that Volodya and Warnig worked for the same firm," says Mrs. Pietsch, using Mr. Putin's nickname. "I asked her what she meant. She said Matthias was in the Stasi, and Volodya the KGB. I was quite surprised by her candor." She says Mrs. Putin told her Mr. Warnig and her husband worked together in Dresden in the 1980s. The friendship between Mrs. Pietsch and Mrs. Putin is chronicled in dozens of faxed messages and letters she received from Mrs. Putin, some of which were reviewed by The Wall Street Journal. The letters reveal the two women shared an intimate friendship, in which they speak openly about their hopes and fears, families and friends. Copies of the letters indicate that Mrs. Putin faxed them from St. Petersburg City Hall, the Kremlin, and Mr. Warnig's offices at Dresdner. Shortly after the collapse of the communist regime in East Germany, the KGB closed down most operations in Germany and Mr. Putin went back to his hometown, Leningrad, which later reverted back to its pre-revolutionary name St. Petersburg. In "First Person," a book of autobiographical interviews published in 2000, Mr. Putin says he quit the KGB in 1991 after more than 15 years with the agency, a move he described as the "toughest decision of my life." Bernard Walter, Dresdner's retired former CEO, who in the early 1990s was responsible for the bank's operations in Eastern Europe, says he hired Mr. Warnig during their first meeting in 1990. He says the former spy presented himself as an employee of the East German Economics Ministry. That was the cover story he also used for his espionage operations in West Germany, according to Mr. Weigelt. At the time, East German functionaries were highly sought after by German firms looking to expand into the Soviet Union. They often spoke Russian and had close ties to Soviet officials. "I thought he was well-educated and very excited about working in the West," Mr. Walter said. Mr. Walter says he had no knowledge of Mr. Warnig's Stasi past. Like more than 3,000 other employees hired by Dresdner Bank in the former East Germany, Mr. Warnig signed a questionnaire in which he denied any connection to the Stasi, according to Mr. Walter. He added that he would never have hired him if he'd suspected Mr. Warnig served in the agency. In Russia, by contrast, ex-KGB agents face little public opprobrium. Mr. Putin himself has never concealed his affinity for former spies. In "First Person," he said he once told the German consul in St. Petersburg: "I understand you've got a campaign going against former employees of state security, they're being caught and persecuted for political reasons, but these are my friends, and I will not renounce them." In 1990, Mr. Putin took a job as an adviser to St. Petersburg city boss Anatoly Sobchak. As head of City Hall's external relations committee from June 1991, Mr. Putin was the most important contact for Western businessmen in Russia's former imperial capital. Soon, events conspired to make him even more valuable. In August 1991, an attempted hard-line coup against Soviet leader Mikhail Gorbachev ended in victory for the reformers grouped around Boris Yeltsin, the Russian president. Foreign companies sniffed new opportunities as Soviet communism crumbled. That month, Mr. Walter says he sent Mr. Warnig to St. Petersburg to look into setting up an office. It opened in December 1991. Officials in St. Petersburg could see Mr. Putin and Mr. Warnig were acquainted. "It was Putin who introduced me to Matthias," says Sergei Belyaev, former deputy mayor in charge of privatization. "It was obvious from the start they had comradely relations." Mr. Warnig's ties to Mr. Putin were a big asset. "You needed a license to start a business, and Putin signed all the licenses," says Dieter Mankowski, head of the German Industry and Trade Association office in St. Petersburg in the early 1990s. "To do business...you needed a protector. This could be a crime syndicate or it could be a state official." At the time, Mr. Sobchak dreamed of turning St. Petersburg into Russia's financial capital, and was eager to lure foreign banks to the city. Over the next two years, Messrs. Walter and Warnig held talks with St. Petersburg officials -- including Mr. Putin -- on opening a branch there, in a joint venture with Banque Nationale de Paris. City Hall helped BNP-Dresdner get the impressive granite palace in St. Isaac's Square that had once been the Imperial German embassy. The bank opened its doors in September 1993. Dresdner's advantage in Russia was solidified shortly afterward when Russia imposed a moratorium on the registration of foreign-owned banks. Big Favor The following year, Dresdner leaped at the chance to do the Putin family a big favor. Mrs. Putin fractured her spine and the base of her skull in a car accident in Russia. Dresdner spokesman Mr. Blohm says Mr. Putin telephoned Mr. Walter after the accident and asked the bank to assist his wife. The bank responded immediately "for humanitarian reasons," Mr. Blohm said. He said the bank paid for Mrs. Putin to be airlifted to a special clinic in Bad Homburg, Germany, and covered part of the rehabilitation costs. Mr. Blohm declined to specify the total amount of the assistance. "If Dresdner hadn't made the arrangements, numerous other companies would have offered," said Mr. Mankowski. "The medical system in St. Petersburg at the time was atrocious." The bank also says it paid for Mr. Putin to make two trips to Hamburg, where he gave talks to local businessmen. In 1995, the Putin family suffered a setback when its dacha burned to the ground. According to Mrs. Pietsch and a biography of Mr. Putin by German author Alexander Rahr, the fire also consumed a suitcase full of cash. According to Mrs. Pietsch and Mr. Mankowski, Dresdner subsequently paid travel and living expenses for Mr. Putin's two daughters, Maria and Katerina, so they could attend public schools in Hamburg. Handwritten letters from Lyudmila Putin to Mrs. Pietsch show that Mrs. Putin saw the schooling as a chance for the girls to practice German in a native-speaking environment. "I hope the three of us will be in Hamburg (I mean me and the children), if the arrangement with the school works out," Mrs. Putin wrote in 1996. A Kremlin spokesman and a Dresdner spokesman denied Dresdner organized trips to Germany for the Putin daughters. But the Kremlin spokesman acknowledged that Mr. Putin had made a number of trips to Hamburg to attend conferences bringing together German and Russian municipal officials, and that the trips were paid for by "the German side." Today, such payments by private companies to government officials might be interpreted as illegal bribes under both German and Russian law. But at the time, they were common features of business life in Russia, where government officials drew tiny salaries. Germany didn't outlaw such payments until 1999, when an international convention on corruption came into force, according to Peter Eigen, chairman of Transparency International, a Berlin-based anticorruption organization. As the 1990s wore on, Dresdner became a major force in Russian business, cementing its relationship with Gazprom, the sprawling, state-owned gas monopoly. Mr. Walter acted as the company's adviser for six years until 2000. Dresdner was global coordinator when Gazprom first sold its shares to international investors in 1996 and advised Ruhrgas AG on its acquisition of a 2.5% stake in Gazprom from the Russian government in 1999. In January 2001, Dresdner bought the U.S. banking firm Wasserstein Perella & Co. and merged it with its investment banking arm to form Dresdner Kleinwort Wasserstein. Shortly after Allianz bought Dresdner in April 2001, Wasserstein Perella co-founder Bruce Wasserstein left the firm. Mr. Warnig, meanwhile, was settling into life in Russia. "When I first met him, he was all Radeberger beer and sausages," said one former colleague. But he quickly improved his Russian, and bought a country house in Lodeinoye Pole, about 120 miles from St. Petersburg. The Putins were frequent visitors there, according to the banker's friends. "He became more Russian than the other foreigners," says Mr. Belyaev. In 2002, after years moving between jobs in Dresdner's Moscow and St. Petersburg offices and a stint in Germany for additional training, Mr. Warnig settled in the Russian capital as head of Dresdner Bank ZAO, the bank's Russian unit. In the summer of 2003, the local DrKW office was merged into Dresdner Bank ZAO leaving Mr. Warnig the whole group's top executive in Russia. Meanwhile, Mr. Putin was also moving up the ranks. He'd got a job as a minor Kremlin bureaucrat shortly after Anatoly Sobchak was defeated in the mayoral elections of 1996. But the then-president, Boris Yeltsin, spotted him as a rising star, and in less than two years he was named to head the FSB, the domestic intelligence agency. It was a time when Mr. Yeltsin was beset by corruption scandals, ill health and threats from increasingly powerful rivals. But Mr. Putin remained resolutely loyal to the ailing president, and was rewarded with the job of prime minister in 1999. Then as Russia ushered in the millennium, Mr. Yeltsin bowed out of politics and anointed Mr. Putin as his successor. As Mr. Putin was catapulted to power, Mr. Warnig's friendship proved helpful to the bank, especially after the new president began appointing old colleagues from St. Petersburg City Hall to senior government posts. "He has connections to all the ministries," says Stefan Stein, head of the St. Petersburg branch of the German chamber of commerce. "He knows when projects are coming up and he can get favorable terms. He's the man who opens doors for Dresdner." >From the late 1990s, Dresdner's investment banking unit worked for the Russian government valuing big oil and coal companies slated for privatization. It also stepped up ties with Gazprom, where Alexei Miller, Mr. Putin's former St. Petersburg deputy, became CEO in 2001. In 2003, DrKW and Morgan Stanley were lead managers in placing $1.75 billion of Eurobonds for the gas company -- the largest-ever emerging-market corporate bond issue. Dresdner also took on highly sensitive government assignments. Last summer, Dresdner became involved in the government's assault on oil giant OAO Yukos, once Russia's most successful private company. In August, with the oil company's founder Mikhail Khodorkovsky on trial for tax evasion and fraud and Yukos staggering under a multibillion-dollar back tax bill, Russia's Ministry of Justice commissioned DrKW to value Yukos core asset Yuganskneftegaz as court bailiffs prepared to sell it. Many Western analysts viewed the sale as a politically motivated expropriation designed to destroy Mr. Khodorkovsky, who had been funding opposition parties. The trophy mandate was awarded without any competitive bidding, rival banks say, even though Russian law requires tenders for most government contracts. Mr. Putin's press office denied the Kremlin had anything to do with the decision. DrKW says it was chosen because "we have strong sectoral knowledge and execution skills, and our work is done to the highest professional standard." At the time, investors feared the government would try to sell the Yukos unit at a firesale price to a state-controlled company. But in its report, DrKW said Yugansk was worth at least $15 billion, a figure close to the market consensus. The justice ministry ignored that advice, instead seizing on the lowest figure cited in the report, $10.4 billion -- a sum DrKW said was "overly conservative." Fearing for its reputation, DrKW took the unusual step a few days later of publishing key parts of its valuation on the Internet. The unit was finally sold on Dec. 19 to an obscure shell company, Baikal Finance Group, for $9.3 billion. Days later, Baikal was acquired by state-owned OAO Rosneft. DrKW wasn't involved in financing the deal. DrKW is advising Gazprom on its merger with Rosneft -- another job awarded without any open bid, other banks say. As is typical in large transactions, Gazprom later hired Citigroup and Deutsche Bank to provide fairness opinions that would reassure investors. This month, Gazprom nominated Mr. Warnig to the company's board. Management portrayed the move as an effort to bring in more independent directors and make the company more transparent. But some Gazprom investors were unimpressed. "How can he be considered an independent director if Dresdner is doing all the big evaluations for Gazprom?" asked William Browder, head of Hermitage Capital Management and a leading investor in Russia. Mr. Putin and Mr. Warnig still meet, occasionally dining together at the president's country residence, though not as often as they used to, friends say. "A bank is all about relationships," says a former colleague of Mr. Warnig from his days in St. Petersburg in the 1990s. "Warnig was in the right place at the right time." -- ----------------- R. A. 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