The ageing playboy of Europe

It's the playground for the world's sugar-daddies and their young charges, a secretive, secure and wealthy haven perched on the edge of an azure coast. As Britain shudders under autumn storms, the pristine streets of Monte Carlo are home to a procession of face-lifted ladies walking tiny, perfectly groomed dogs in the sun, and to convertibles driven by elderly gentlemen with peroxide passengers.

Monaco has seen a new addition to its moneyed classes over the last five years. As Boris Yeltsin's cowboy economy boomed, the Russians invaded in their thousands, blowing their cash on the casino, Jimmy'z night-club, Dom Perignon and gym-honed escort girls who take their payment in diamonds and Gucci.

But now the Russians, so evident in all their Versace-and-furs glamour all through last summer, have become much thinner on the ground, recalled home to deal with money-spinning empires that are threatening to become liabilities. And their departure, sudden and unannounced, like that of a guest who turns out to be a con-man, is putting a new perspective on the future of the little principality, where every street is scanned by a security camera and every other car is a Mercedes.

Last week, one Monegasque estate agent said he had received calls from three Russian clients asking him to sell their apartments quickly. With the devaluation of the rouble, the Moscow biznesmeny dealing in roubles with dollar debts need the money to pay those debts, and that means a liquidation of their resources overseas.

A few months ago I was walking along the avenue Princesse Grace with a Monegasque acquaintance, a one-time croupier in the Grand Casino. "Look, they're all empty," he said, waving a hand at floor upon floor of curtainless, unoccupied apartment blocks. "Empty, but occupied." He gave a wink; already he had said more than virtually any Monegasque would tell an outsider.

Many of the Russian owners selling this week have never seen their apartments; the property here, like Monaco's private banking system, has been a funnel for one of the largest money-laundering operations in the world - by the Russian Mafia. An average three-bed apartment with a view of the mountains and the sea will cost around pounds 1m, paid for in "dirty" money siphoned off Russian state funds, or extorted from the Moscow business community. Accepted (legally) by the seller, it emerges, clean, as the proceeds of a simple property transaction, when the buyer cashes it in.

The French police, who investigate money-laundering by Russian exiles on the neighbouring Cote d'Azur, also follow the situation in Prince Rainier's playground. "We know of considerable activity in Monaco," says a French investigating officer based in Marseilles.

"It is impossible to calculate exactly how much they have bought," he explains, "because the transactions are nominally legal and we have no jurisdiction in Monaco. But it is a convenient and effective way to clean money."

Informed estimates put the amount of money washing through the property and banking system in the principality in the hundreds of millions of pounds. The banks are another target for Moscow's wealthy dry-cleaners, as they are in Switzerland and the City of London.

Mafia infiltration of Monte Carlo has been a feature of recent decades, though the mafiosi were originally Italian. After the Italian government's crackdown, their numbers diminished, as did those of more respectable Italians, once the life blood of the principality's restaurants and casinos, but now hit by recession and the decline of the lira.

Property prices are 30 per cent lower than they were five years ago, meaning that you can pick up a two-bedroomed place in Fontevieille, the "trendy" area on reclaimed land where David Coulthard lives, for just pounds 600,000. And if the Russians leave, too, the tough questions the 6,000 native Monegasques should be asking themselves may become even tougher.

The grand casino on the hilltop is now running at a loss, as is the Societe des Bains de Mer (SBM), the company 70 per cent owned by the state, which runs it and the country's most glamorous five-star hotels and restaurants.

In a way, the fate of the SBM is paralleling that of Monaco itself. The mentality at its establishments, which include the Hotel de Paris, Alain Ducasse's Restaurant Louis XIV (three Michelin stars) and Jimmy'z, remains rooted firmly in a past where the rich - less mobile and worldly than they are now - needed Monaco more than Monaco needed them.

This is recognised by Michel Novatin, a French industrialist who was appointed its managing director last year with instructions to shake up the system.

"Like a lot of things in Monaco, the SBM has benefited from an image which has now changed," he says. "Time has caught up with Monaco. We have lived on a reputation and now is the time to adapt to new trends."

Novatin is speaking about tourism (one of Monaco's main sources of income), but his words should echo in the minds of all the principality's native businessmen. "Up until now there has been a mentality of `We're the best, nothing can happen to us', but it's not like that now. For the same price people can do the same things they do in Monaco on the other side of the world."

In private, Paul Dijoud is said to have spoken words similar to Novatin's, believing that some action was needed to clean up the principality's act. Dijoud was appointed Minister of State by Prince Rainier in 1996; traditionally, this role, occupied by a French diplomat, provides a sunny sinecure for someone at the end of his civic life.

But Dijoud - with the approval of Rainier and the younger generation of Monegasques keen to see the old boy network challenged - started to cut at some of the shadier links in the Monegasque business chain. Later that year several long-term visitors in whom the Italian police had expressed an interest were, in an unprecedented move, thrown out. But Dijoud's minuscule pushes towards democratisation frightened the statelet's entrenched interests.

"Rainier is his own man when it comes to matters of the state and the succession," says a businessman who knows the prince. "But, an astute and immensely wealthy businessman himself, he is aware of what makes his world go round."

Dijoud left in February last year, and is now the French ambassador to Buenos Aires. Elections to the National Council earlier this year did little to promote the standing of the young, reformist set.

To those who know him, Prince Rainier is a combination of sharp businessman, proud patriarch and wily politician. Roger-Louis Bianchini, a journalist from Nice, 15 miles along the coast, who has published the definitive history of Monaco's business affairs, has a theory that the wealth of Monaco is built on three pillars: security, secrecy and glamour. "If you could draw a graph of Monaco's image," he says, "and juxtapose it on a graph of the property prices, you would find the second followed the first." Or, put another way, take away the image (supplanting it instead, perhaps with a vision of newly rich mafiosi) and what remains?

The image is already suffering, not helped by the antics of royal offspring who make our own royals look like a picture of restraint. The press in Italy and France, with no domestic royalty to bash, make fun of the Grimaldis as if they were their own, and major European royals (like our own) now treat the Grimaldis as something of a soap opera.

The absence of major foreign royals at the principality's major social event, the Red Cross Ball, is more notable every year.

Prince Rainier is 75 this year; he has said that he will not be succeeded by an unmarried heir, and Prince Albert shows no sign of settling down. Those in the know dismiss tabloid rumours that Prince Rainier might skip over Prince Albert, the capricious bachelor, and prepare his sister Caroline for the succession - meaning that Monaco is likely to be rudderless after the ruling prince finally departs.

On the avenue Princesse Grace, Franco, the former croupier, pauses by the Sass-Cafe, where Prince Albert likes to take his dates. Like many other Monegasques, he lives in a state-owned apartment which he rents for a nominal fee. Bilingual in French and Italian, he says he has seen familiar figures from the casino or bar scene appear on television, chained to policemen, on their way to court.

"A guy I used to serve regularly was on RAI [Italian state television], being tried as one of the top five in the Camorra."

Franco knows the sickness at the heart of his state, and knows nothing is going to be done to stem it.