Kremlin relies on criminals and rewards them with political patronage, while top officials collect bribes 'like a personal taxation system'

Russia is a corrupt, autocratic kleptocracy centred on the leadership of Vladimir Putin, in which officials, oligarchs and organised crime are bound together to create a "virtual mafia state", according to leaked secret diplomatic cables that provide a damning American assessment of its erstwhile rival superpower.

Arms trafficking, money laundering, personal enrichment, protection for gangsters, extortion and kickbacks, suitcases full of money and secret offshore bank accounts in Cyprus: the cables paint a bleak picture of a political system in which bribery alone totals an estimated $300bn a year, and in which it is often hard to distinguish between the activities of the government and organised crime.

Among the most striking allegations contained in the cables, which were leaked to the whistleblowers' website WikiLeaks, are:

• Russian spies use senior mafia bosses to carry out criminal operations such as arms trafficking.

• Law enforcement agencies such as the police, spy agencies and the prosecutor's office operate a de facto protection racket for criminal networks.

• Rampant bribery acts like a parallel tax system for the personal enrichment of police, officials and the KGB's successor, the federal security service (FSB).

• Investigators looking into Russian mafia links to Spain have compiled a list of Russian prosecutors, military officers and politicians who have dealings with organised crime networks.

• Putin is accused of amassing "illicit proceeds" from his time in office, which various sources allege are hidden overseas.

The allegations come hours before Putin was due to address Fifa's executive committee in Zurich in support of Russia's bid to host the 2018 World Cup. Putin last night abruptly cancelled his trip, complaining of a smear campaign to "discredit" Fifa members. In an angry interview with CNN's Larry King Live, recorded before the latest disclosures, Putin also denounced the cables and warned the US not to stick its nose in Russia's affairs.

He made clear he was not amused by a US diplomat's description of him as "Batman" and President Dmitry Medvedev as "Robin". "To be honest with you, we did not suspect that this [criticism] could be made with such arrogance, with such rudeness, and you know, so unethically," Putin remarked.

The principal allegations stem from a Spanish prosecutor, José Grinda González, who has spent more than a decade trying to unravel the activities of Russian organised crime in Spain. Spanish authorities have arrested more than 60 suspects, including the top four mafia bosses outside Russia.

In a startling briefing for US officials in January, Grinda said Russia was a "virtual mafia state" in which "one cannot differentiate between the activities of the government and OC [organised crime] groups".

Grinda said he had evidence – thousands of wiretaps have been used in the last 10 years – that certain political parties in Russia worked hand in hand with mafia groups. He alleged that intelligence officials orchestrated gun shipments to Kurdish groups to destabilise Turkey and were pulling the strings behind the 2009 case of the Arctic Sea cargo ship suspected of carrying missiles destined for Iran.

At the summit of what is known in Russia as the power "vertical" lies the Kremlin, a prime beneficiary of the entrenched system of kickbacks, bribes, protection money and suspect contracts.

In a detailed and apparently plausible analysis of how corruption in the capital works, the US ambassador John Beyrle cited one source as saying: "Everything depends on the Kremlin … [former Moscow mayor Yuri] Luzhkov, as well as many mayors and governors, pay off key insiders in the Kremlin."

Beneath the Kremlin is a broad layer of top officials – mayors and governors – collecting money based on bribes almost like their own personal taxation system. At the next level down the FSB, interior ministry and police collect protection money from businesses, licit and illicit.

"Criminal elements enjoy a krysha [a term from the criminal/mafia world literally meaning roof or protection] that runs through the police, the federal security service, ministry of internal affairs (MVD) and the prosecutor's office, as well as throughout the Moscow city government bureaucracy," Beyrle noted. "The Moscow city government's direct links to criminality have led some to call it 'dysfunctional' and to assert that the government operates more as a kleptocracy than a government."

Grinda said the FSB had two ways to eliminate "OC leaders who do not do what the security services want them to do". The first was to kill them. The second was to put them in jail to "eliminate them as a competitor for influence".

Sometimes the FSB put crime lords in prison for their own protection. Luckier crime leaders might end up in parliament. "The government of Russia takes the relationship with organised crime leaders still further by granting them privileges of politics, in order to grant them immunity from racketeering charges," Beyrle noted.

The US is not alone in its assessments. In one cable, the Foreign Office's Russia director, Michael Davenport, is quoted as calling Russia a "corrupt autocracy".

The cables also reveal that the Americans believe Putin was likely to have known about the operation to murder Alexander Litvinenko in London in 2006.

The Kremlin has denied involvement but a remark by another US ambassador in Moscow, Williams Burns, sums up US attitudestowards the new Russia: "Whatever the truth may ultimately be [about Litvinenko] – and it may never be known – the tendency here to almost automatically assume that someone in or close to Putin's inner-circle is the author of these deaths speaks volumes about expectations of Kremlin behaviour."

Russia's foreign intelligence chief said yesterday that he would order his spies to study the cables relating to Russia. Mikhail Fradkov, the head of Russia's foreign intelligence service (SVR), told the ITAR-TASS news agency: "There are many issues which have been revealed by the disclosure by WikiLeaks – this is material for analysis. We shall report our conclusions to the leadership of the country."

• This article was amended on 2 December 2010. The original gave an incomplete name for a Spanish prosecutor, referring to him as José González. This has been corrected.