Strongman

by Roxburgh, Angus

  Politkovskaya asked if she can at least bring food for the children.

  ‘Do you let ours eat in the security sweeps? Yours can do without too.’

  Taming the oligarchs

  In his first address to the nation, 12 hours after becoming acting president, Putin had pledged to respect freedom of speech, freedom of the mass media and property rights. On 28 July 2000 he had a showdown with the country’s top 20 businessmen and bankers to explain what he meant, and set out the new rules of the game.

  These were men who had acquired vast fortunes during the Yeltsin years by exploiting every loophole, breaking and bending laws, bribery, thuggery, extortion, and, most simply of all, by helping themselves to companies and resources offered to them in exchange for ensuring Yeltsin’s political survival. They owned the country’s major oil and gas companies, pipelines, aluminium smelters, telecoms and advertising, automobile plants, iron and steel works, a brewery and the top banks. Mingling with them in a grand, columned Kremlin hall as they waited for the president to arrive were the government’s young team of reformers – Kasyanov, Kudrin, Gref – who above all needed the tycoons to pay their taxes so they could get the country’s finances in order. The oligarchs themselves had other concerns, having heard Putin threaten their existence ‘as a class’. They had just seen their colleague Gusinsky effectively stripped of his wealth and hounded out of the country. His fellow media tycoon Boris Berezovsky was nowhere to be seen.

  The oligarchs were seated democratically around a huge doughnut-shaped table. But when the president joined them in the circle there was no doubt about who was in charge. The meeting lasted two and a half hours, but Putin’s offer was simple: there would be no reversal of the privatisation process, on two conditions – that the oligarchs started paying their taxes, and that they kept out of politics. Putin was careful not to put it in the form of an ultimatum, but that is what it was.

  In an interview, German Gref summed up what happened: ‘Putin sent a strong message that no nationalisation or expropriation of property was planned. He put it to them like this: “We are making a gesture to you, we are sharply decreasing taxes, we are creating a favourable investment environment and defending property rights. But please, since we are lowering the taxes, you should pay them. And secondly, if it’s business you’ve chosen, then do business.” ’5

  The businessmen emerged from the meeting almost singing with relief. Most of them had no desire to get into politics anyway, and paying taxes was a small price to pay for their fortunes. Vladimir Potanin, president of the mining and metals conglomerate Interros, sounded almost repentant: ‘The oligarchs had set themselves up as an elite, but society doesn’t accept this elite. We have to behave better.’

  The initiative for this meeting had come from Boris Nemtsov, the former governor of Nizhny Novgorod who had helped to kick-start the privatisation process in the mid-1990s and now headed a political party, the Union of Right Forces, to defend the interests of the nascent middle class. He described the event as a watershed – the point where (he put it, with irony, in Marxist terms) ‘the ten-year history of the primitive accumulation of capital’ came to an end. In other words, this was the moment when Russia’s ‘robber barons’ were given the chance to turn into respectable businessmen.

  For the most part, the oligarchs went along with that. Gusinsky and Berezovsky went into exile – the former quietly, the latter continuing to wage battle against Putin from abroad. Roman Abramovich, the owner of the oil giant Sibneft, did become a member of the Duma, and also governor of the remote region of Chukotka. But he did not use his political influence to challenge Putin. He was far more interested in his British football club, Chelsea, which he bought in 2003.

  Only one oligarch refused to toe the line – Mikhail Khodorkovsky. His intransigence would land him in a Siberian prison camp for many years and turn him into one of the greatest sources of tension between Russia and the West.

  The Khordorkovsky affair

  Khodorkovsky had taken his earliest steps in business almost as soon as it was possible, back in the days of Mikhail Gorbachev’s tentative perestroika reforms. As a communist youth functionary, he used his connections to set up a café, an import business and, eventually, one of Russia’s first commercial banks – Menatep. From then on his rise was vertiginous. In 1995, in the ‘loans for shares’ scheme designed to bail out the bankrupt Yeltsin government, he acquired a major stake in Russia’s second-largest oil company, Yukos. The following year he bought the shares – effectively from himself – and ended up with a majority stake in Yukos for just $309 million, a fraction of its real value. Within months the company was worth $6 billion. None of this broke the law: the scheme was devised by the government itself.

  There is no doubt that Khodorkovsky was a devious wheeler and dealer as he built his empire. In his excellent study, The Oligarchs, the American journalist David Hoffman confesses that even after painstaking investigation he could not fathom some of Khodorkovsky’s manoeuvres and schemes, involving offshore transactions, front companies and ‘sleight of hand’.6

  But once he had complete control of Yukos he underwent something of a conversion and decided (largely because he wanted to attract foreign investors) to adopt squeaky-clean Western standards of accountancy and transparency. Khodorkovsky became the darling of the West because he, more than any other oligarch, seemed to epitomise a new breed of Russian capitalist – not just a money-grabbing shark, but a philanthropist too. He adopted a corporate governance charter at Yukos, and was the first businessman to introduce US-standard accounting practices. He used some of his fortune to set up a lyceum on an eighteenth-century estate outside Moscow to provide education to 130 underprivileged children. His Open Russia Foundation distributed more than $15 million a year to civic projects and charities involved in education, public health, leadership programmes and cultural development.

  And yet there is no name more certain to bring that look of icy contempt into Vladimir Putin’s eyes. Khodorkovsky would end up in jail for economic crimes – tax evasion, fraud, embezzlement. But asked about him at press conferences, Putin would not shrink from throwing in a few other accusations – ‘political’ crimes, even murder.

  To be sure, Khodorkovsky was no saint. John Browne, the chief executive of BP, was not won over when Khodorkovsky visited him in Britain in February 2002, to offer BP a 25 per cent share in Yukos. Browne later described how the soft-spoken Khodorkovsky made him nervous. ‘He began to talk about getting people elected to the Duma, about how he could make sure oil companies did not pay much tax, and about how he had many influential people under his control. For me, he seemed too powerful. It is easy to say this with hindsight, but there was something untoward about his approach.’7

  For the reforming Russian government ‘untoward’ was an understatement. According to German Gref, ‘not a single draft went through without Yukos’s say so’. In fact, the bribing of members of the State Duma was commonplace – deputies pocketed fortunes from all sorts of business interests – but the oil companies were most active, and Yukos most of all. When it came to a new oil export duty that would have reduced the oil company’s profits, things got heavy. Gref recalls how he was visited on the eve of the Duma vote by Vasily Shakhnovsky, president of Yukos-Moskva. ‘Mr Gref,’ he said, ‘we very much appreciate what you have done for the development of the market economy, but tomorrow you’re going to introduce a law that contradicts our interests, so we would like you to know that, first of all, this law will not get through. Everybody will vote against it – we have agreed on that with everybody. And the second point: if you insist on it, we will write a collective letter from all oil producers asking for the resignation of you and Mr Kudrin for lack of professionalism. It’s nothing personal, but maybe you could just postpone the discussion of this law, and we can come to some arrangement with you.’8

  When Kudrin and Gref arrived in the Duma next morning they discovered a solid bloc, including the large communist fac
tion, had been stitched together, which defeated the bill. Gref later mused on the irony of it all: ‘The communists, supposedly the champions of social policy, voted against a tax on the super-incomes of the oil companies!’

  It was a dramatic blow for the reformers. ‘We didn’t have enough resources in the budget to pay our debts,’ Gref recalled. ‘Oil prices were rising, but that was just making the oil companies richer. We got nothing from it.’ It took another year before Gref managed to pass a diluted version of the law through parliament.

  Even more seditious, from Putin’s point of view, were Khodorkovsky’s political ambitions. He funded several opposition parties, including the liberal Yabloko, the Union of Right Forces, and the Communist Party. In early 2003 he held secret meetings with party leaders and offered to donate tens or even hundreds of thousands of dollars to finance their campaigns in the coming December Duma elections.9 According to the prime minister, Mikhail Kasyanov, it was the financing of the communists that particularly infuriated Putin. Kasyanov said later he was astonished to discover that while supporting the two Western-oriented parties was ‘approved’, funding the communists – though perfectly legal – apparently required some special secret dispensation from the president.10

  Khodorkovsky claimed that what he did was normal ‘lobbying’, as happens in any country, but the Kremlin saw it differently: ‘He was buying up the Duma!’ Putin’s spokesman, Dmitry Peskov, exclaimed to me, clearly as affronted by the idea as his boss was. The Kremlin apparently feared that Khodorkovsky was planning to use his influence in the Duma to change the constitution, to turn Russia into a parliamentary democracy – and perhaps even become prime minister himself, directly challenging Putin’s power.

  People who know Khodorkovsky often point to his reckless streak. It was on show at a dramatic and perhaps fateful meeting of leading businessmen with Putin in St Catherine’s Hall in the Kremlin on 19 February 2003.11 The main item on the agenda was corruption. Khodorkovsky was the main speaker, and he was planning to say some extraordinarily provocative things about corruption he suspected was going on in the top circles of government. He was nervous, and called his vice-president, Leonid Nevzlin, for advice. ‘Do you think my presentation is dangerous?’ he asked.

  ‘Well,’ Nevzlin conceded. ‘What if Putin himself is actually mixed up in these deals?’

  ‘Come on!’ exclaimed Khodorkovsky. ‘The president controls the state budget. Do you think he’d get involved for a few million dollars of kickback?’12

  Khodorkovsky cleared his presentation with Putin’s chief of staff, Voloshin, and prime minister, Kasyanov. He went into the meeting armed with graphs and bar charts to illustrate his points.

  Much of his presentation was based on opinion-poll findings: 27 per cent of Russians believed corruption to be the most dangerous threat to the nation; 49 per cent believed most state officials were corrupt (15 per cent thought all officials were); a large majority felt the government either could not or would not do anything to combat corruption.

  ‘If you look at the next slide,’ Khodorkovsky went on, ‘you can see that the level of corruption in Russia is in the region of 30 billion dollars – that’s 10 to 12 per cent of GDP.’

  Another slide showed that 72 per cent of Russians had no faith in the justice system because judges were institutionally corrupt. And Khodorkovsky raised a remarkable fact about applications for Russian university places. Young people were less interested in studying to become engineers or oilmen than ... tax inspectors! Their salaries would be low, but the opportunities to supplement them through bribery were enormous. ‘If we are setting our young people on this course, it’s something we should think about,’ said Khodorkovsky.

  ‘Well, there is food for thought there,’ retorted Putin, ‘but let’s not apply the presumption of guilt to our students!’

  But Khodorkovsky was only warming up. Now he moved on to a specific case of corruption that involved people in Putin’s closest circle – specifically his deputy chief of staff and confidant Igor Sechin, who effectively controlled the state oil sector. (He would soon become chairman of the government-owned Rosneft.)

  Khodorkovsky referred to Rosneft’s purchase, the previous month, of a smaller oil company, Severnaya Neft, for $600 million – far in excess of its true value. ‘Everyone believes that this deal had, so to speak, an ulterior motive.’

  For everyone listening the implication was clear. As Andrei Illarionov, Putin’s adviser, recalled later: ‘It was obvious that the difference between the sale price and the actual price was a pure and simple kickback – corruption.’13 In other words, the huge excess payment to the small company was shared by its owners with the government officials who had authorised it.

  ‘Yes, corruption is spreading in our country,’ Khodorkovsky continued. ‘And you might say that it started right here with us ... but it has to stop some time!’

  Putin shot back, asserting that as a state company Rosneft was obliged to buy assets such as Severnaya Neft in order to increase its reserves. As for Khodorkovsky’s own company, Putin hinted that he had acquired it illegally: ‘Some companies like Yukos have huge surpluses of oil. How they acquired them is precisely what today’s meeting is about! And let’s not forget the question of the payment – or non-payment – of taxes. Your own company [Yukos] had problems with non-payment of taxes. I have to give you your due – you came to an agreement with the tax authorities and the case was closed, or is being closed. But how did these problems arise in the first place?’

  And Putin ended with a clear threat. ‘So I am passing the buck back to you,’ he said. It meant: you talk to me about my people being corrupt, and my people will start looking at your corruption.

  Kasyanov, who was sitting next to the president, says the oligarchs around the table ‘nearly climbed under the table in fear’. Was Putin reopening the whole issue of how Russia’s strategic industries were privatised in the 1990s?

  Kasyanov says he went to see Putin in his office afterwards. ‘Naively, I thought the president didn’t know the details of the Rosneft deal. I said, “You shouldn’t have reacted so sharply. Khodorkovsky’s right.” ’ But Putin shot back, insisting that it was Rosneft’s right as a state company to increase its assets and there was nothing wrong with the deal. Kasyanov was taken aback: ‘He started citing various figures that even I, the prime minister, didn’t know. He knew more about the affair than I did.’14

  To try to pre-empt the reprisals at which Putin had hinted, Khodorkovsky came to Kasyanov two weeks later with a plan. Speaking, he said, on behalf of his fellow oligarchs, he proposed a new law, under which the tycoons who had bought up state enterprises on the cheap in the 1990s – businesses that were now worth billions of dollars – should pay compensation to the state, a sort of one-off tax to cover the massive increase in their worth. The windfall would go into a special fund to finance ‘important reforms’. Kasyanov liked the idea, which could have given the government an extra $15–20 billion to spend on new highways, high-speed rail links, power lines, airports and the like. He asked Khodorkovsky to draw up a draft law, which he did within a week. Kasyanov presented it to President Putin. And that was the last that was heard of it.15 Putin was already thinking of other ways to make Khodorkovsky pay.

  Leonid Nevzlin remembers receiving disturbing news from a contact in Russia’s intelligence service. ‘I was given information that there was a special group answerable only to the FSB chief Patrushev and his deputy Zaostrovstsev, whose job was to build a criminal case against Yukos and watch its managers and shareholders.’

  In the early summer a think-tank known as the National Strategy Council published an analytical report entitled ‘The State and Oligarchy’, written by an influential thinker, Stanislav Belkovsky, who was regarded as close to the siloviki. He argued that the oligarchs were preparing nothing less than a creeping putsch, which would bring the Duma under their control, leading to the rewriting of the constitution and the crowning of Khodorkovsky as all-
powerful prime minister, with the presidency emasculated.

  At Putin’s annual press conference a few days later, a reporter was primed to ask a question about the Belkovsky report, and the president was ready with a chilling reminder of how he dealt with his political enemies: ‘I am absolutely sure that the appropriate separation of business and power has been established ... Those who disagree with this policy, as the saying goes, either no longer exist, or have been sent far away.’

  Putin had many reasons to fear or resent Khodorkovsky. For two and a half years he had defied the president’s instruction to the oligarchs to keep out of politics. But even Khodorkovsky’s purely business activities challenged the siloviki. They regarded the country’s natural resources, particularly oil and gas, as vital strategic assets, not to be entrusted to private individuals – and certainly not to foreign states. Khodorkovsky had the opposite view: the private sector could run things more efficiently, and if foreign participation helped, so much the better.

  In April 2003 Yukos (now Russia’s largest oil producer) agreed to merge with Roman Abramovich’s Sibneft to form what would be the world’s fourth biggest oil company, worth $35 billion. (It was this deal that allowed Abramovich to buy Chelsea football club.) Khodorkovsky then took a further step towards disaster – by starting talks with both ChevronTexaco and ExxonMobil about selling one of them a major stake in the Russian company. The prime minister Kasyanov gave his approval for the deal. But the siloviki were incensed.

  Through the summer of 2003 events moved fast. In June Yukos’s security chief, Alexei Pichugin, was arrested and accused of murder. The following month Khodorkovsky’s partner, Platon Lebedev, chairman of Group Menatep, the holding company that controlled Yukos, was also arrested. Prime Minister Kasyanov immediately condemned it and pointed out that arresting entrepreneurs on suspicion of economic crimes was bound to undermine the country’s image and deter investors.