In 1985, a young KGB officer arrived in provincial East Germany. His name was Vladimir Putin. What exactly Putin got up to in Dresden is a mystery. The official version says not much: he drank beer, put on weight, lived in an ordinary apartment with his wife, Lyudmila, and their two daughters. While other Soviet spies were having adventures, Putin – so the story goes – sat out the late cold war in a paper-shuffling backwater.

The investigative journalist and former Financial Times reporter Catherine Belton has dug deeper. Her groundbreaking book, Putin’s People: How the KGB Took Back Russia and then Took on the West, offers a far more terrifying version. Putin was a senior liaison officer with the Stasi, East Germany’s secret police, she suggests. And Dresden was a key base for KGB operations, including murderous ones, in which Putin allegedly played a direct part.

During its struggle with capitalism, the Politburo funded radical terrorist groups in the Middle East and elsewhere. It supported the Red Army Faction, the far left outfit that carried out a series of deadly attacks in the 1970s and 1980s in West Germany. Belton tracks down a former member who recalls how he travelled secretly to East Berlin. From there, he was driven to Dresden for meetings with Comrade Putin and another KGB officer.

The KGB gave the West Germans weapons and cash. And it recommended possible targets. One may have been Alfred Herrhausen, the head of Deutsche Bank, who was blown up in 1989 with a sophisticated bomb on his way to work, weeks after the Berlin Wall fell. Moscow’s goal was to disrupt and to “sow chaos in the west”, the ex-terrorist tells Belton, a mission Putin would continue energetically from within the Kremlin, as prime minister and president.

The story is one of several hair-raising revelations. Belton gives a chilling account of Putin’s rise to power and his personal corruption. Previous books have been written on the same theme, including Karen Dawisha’s notable Putin’s Kleptocracy. But Belton offers the most detailed and compelling version yet, based on dozens of interviews with oligarchs and Kremlin insiders, as well as former KGB operatives and Swiss and Russian bankers.

The KGB made extensive use of slush funds and front companies to fund western communist parties. Belton suggests that Putin employs a similar money-laundering model. In the 1990s, he got a job with St Petersburg’s mayor, Anatoly Sobchak. Putin worked hand in glove with the organised criminals who controlled the city’s port and oil refinery. He took bribes and siphoned cash from oil-for-food schemes, the book alleges.

Similar to his Dresden mission, Putin has expended considerable resources in subverting western democracies

Once he succeeded Boris Yeltsin, this corrupt model was rolled out nationally. Putin pushed out Yeltsin-era officials, replacing them with KGB friends. The new president had a goal: to restore Russia as an imperial power. Putin and his allies believed that the return of a strong state and their personal fortunes were linked. They saw themselves as “anointed custodians”, Belton argues, entitled to grab key sectors of the economy and get rich.

In a remarkable chapter, Belton names individuals who allegedly serve as Putin’s financiers. One is Jean Goutchkov, the grandson of a White Russian aristocrat and an executive formerly with HSBC in Geneva. Another is Gennady Timchenko, an oil trader who allegedly acts as a “custodian” for Putin’s wealth. (Timchenko denies this.) Goutchkov is part of a well-developed international network that helped Moscow in Soviet times and now fixes for Putin, she writes.

Collectively, Putin and his St Petersburg team run the state along criminal clan lines, Belton says. There is a common cash pot known as an obschak. This can be used for personal projects, such as the lavish $1bn palace built for the president by the Black Sea. A whistleblower tells Belton that insiders working on the secret villa referred to Putin using nicknames, which included “Michael Ivanovich”, a police chief from a Soviet comedy, “the papa” and “the number one”. At other times, they pointed at the ceiling.

Putin’s People chronicles the ways in which these same slush funds can be deployed to achieve political ends. They might be domestic: rigging an election, say, or influencing events abroad. Similar to his Dresden mission, Putin has expended considerable resources in subverting western democracies. He has bought off leading politicians and funded divisive far-right parties across Europe. In Belton’s clear-eyed view, Russia uses capitalism as a weapon to “get even” with the hated west.

Nowhere is this more evident than in London. The British political and professional class has shown itself to be especially greedy, Belton asserts. Peers have got jobs on the boards of Moscow state corporations, while the London stock exchange has allowed the flotation of these same dodgy firms. (New York, by contrast, has stricter rules.) Kremlin barons have bought up Kensington. Large sums from Russian emigres have flowed into Boris Johnson’s Conservative party, including before the last election.

The grave of murdered ex-KGB agent Alexander Litvinenko, Highgate cemetery, London. Photograph: Toby Melville/Reuters

Belton’s analysis is relentless and convincing. There are gobsmacking moments. According to a former associate of Roman Abramovich, Putin personally directed the tycoon in 2003 to buy Chelsea Football Club (a claim that Abramovich denies). Another source, Sergei Pugachev, a one-time government insider now in oligarch exile, said Putin’s objective was to raise Russia’s profile, with the elite and with ordinary Brits. The acquisition was part of a bigger infiltration of the west by Moscow, via dirty cash. “It was as if a virus was being injected,” Belton writes.

Meanwhile, defining episodes from the Putin era are shown in a new light. In 2002, armed Chechen fighters seized Moscow’s Dubrovka theatre, taking nearly 900 people hostage. It was Igor Sechin, Putin’s gatekeeper and lieutenant, who made the fateful decision to use lethal chemical gas to stun the terrorists, one insider reveals. At least 115 hostages died. Sechin also reportedly instructed a judge what sentence to give Mikhail Khodorkovsky, the oligarch jailed in 2005 for fraud.

This is a superb book. Its only flaw is a heavy reliance on well-placed anonymous sources. Talking publicly about Kremlin corruption is dangerous, as the polonium fate of Alexander Litvinenko shows. Still, the lack of names can be frustrating. Belton writes of a Russian who “slipped through the cracks” to become “close friends with Johnson” when the future prime minister was London’s mayor. Alas, she doesn’t identify him.

There are admirable on-the-record interviews with major players from Putin’s court, including KGB officer turned railways minister Vladimir Yakunin. Yakunin and other secret service figures rejoice at the way the world is going: Brexit, Donald Trump, and the decline of the liberal order. This has been possible, Belton says, because of the west’s readiness to put business above morality. Putin believes anyone can be bought and so far he’s been proved right.

Luke Harding’s Shadow State: Murder, Mayhem and Russia’s Remaking of the West will be published by Guardian Faber in June

• Putin’s People: How the KGB Took Back Russia and Then Took on the West by Catherine Belton is published by William Collins (£25)

• This article was amended on 13 May 2020 to include a denial from a representative of Roman Abramovich regarding his purchase of Chelsea FC, and to clarify the attribution of claims made in the book about the club’s acquisition.

