Two days later, on a visit to Germany, Putin declared with a breathtaking pretence of innocence that the shareholders of Baikal Finance Group were ‘people who have been in the energy business for many years’, and that ‘as I have been informed, they intend to develop some sort of relationship with other energy companies in Russia, which are interested in this stock’. He didn’t know which companies they might be, of course, but ‘state companies have the same right as other players in the market’.
At his annual press conference on 23 December, Putin couldn’t quite remember the name ‘Baikal Finance Group’ any more. That day it had been bought in its entirety by none other than Igor Sechin’s Rosneft. Sechin, it is thought, was the founder of the mysterious and short-lived Baikal Finance Group. ‘Today, the state, using absolutely legal, market mechanisms, is ensuring its interests,’ said Putin. ‘I consider this perfectly normal.’
Meanwhile the trial continued of the man who had built Yukos into an oil giant in the first place. In May 2005 Mikhail Khodorkovsky was found guilty of fraud and sentenced to nine years in jail.
The energy weapon
Western governments – and Western investors – watched these events unfold with some trepidation. But there was worse to come. The repercussions of the Orange Revolution were far from over.
The new Ukrainian president, Viktor Yushchenko, headed straight for Moscow on 24 January 2005, the day after his inauguration, and President Putin seemed to appreciate it. When the Ukrainian referred to Russia as a ‘permanent strategic partner’, Putin noted, with a hint of surprise, ‘What you just said about strategic partnership is a very good and very pleasant sign.’
Nonetheless it was a meeting without smiles. Yushchenko felt misunderstood. He said in an interview: ‘My major concern was that all the steps we were taking, especially when it came to our democratic reforms, or the revival of our history, or the integration of Ukraine into the rest of the civilised world – Russia took all of these as anti-Russian steps.’18
It was a perfunctory visit, lasting only half a day. Then Yushchenko headed straight for Strasbourg to the Council of Europe, and to Brussels for a speech to the European Parliament. When he went to Washington in April he was received as a hero. He earned rapturous applause when he told Congress: ‘Today Ukraine is looking into the future with great hope and expectation. Free and fair elections have brought to state office a new generation of politicians not encumbered with the mentality of the Soviet past.’
Then he was taken to the Oval Office to meet George W. Bush. The president’s chief Ukraine adviser, Damon Wilson, recalled in an interview that Yushchenko seemed to lack focus. ‘He began the conversation by discussing the challenges he was facing as president of Ukraine, in particular the relationship with Russia. He began to set out, I think it may have been 12 points or so, a whole series of particular issues that he saw he needed to work through with Russia. And as he began to enumerate these challenges in a rather longwinded way, President Bush stopped him. He said, you don’t need to worry about these 12 challenges, you have one challenge you need to be concerned about with Russia – is Moscow prepared to see an independent sovereign democratic Ukraine make decisions about its own future? That’s the strategic challenge you face.’19
Wilson says the Americans were rather worried after that first visit. ‘We were quite concerned whether he understood the scale of the task before him – whether he understood how to go about addressing these issues. And, you know, while there was still a lot of enthusiasm and a lot of support, and a commitment in policy terms to figure out how to help him succeed in his task, his visit to Washington really did raise the first alarm bells – that we might have more difficulty than we thought, and how he could follow through on the promise of the Orange Revolution.’
The alarm bells rang louder at the end of the year when Yushchenko surprisingly struck a shady deal that the Americans thought stank of corruption, in order to dig himself out of a major crisis over Russian gas imports.
The first of Putin’s ‘gas wars’ began in March 2005, when the Russians apparently decided to punish the Ukrainians for their Orange Revolution by announcing that, from the following January, Gazprom would more than quadruple the price of its exports to Ukraine from $50 per 1,000 cubic metres to around $225. The situation was complicated by the fact that Gazprom also supplied 25 per cent of the European Union’s gas, mainly through pipelines crossing Ukraine, for which Kiev charged Gazprom transit fees. (Some countries relied 100 per cent on Russian supplies through Ukraine.) Russia supplied gas to all its former Soviet republics at prices far below world levels. But now that Ukraine was snubbing it and declaring itself to be allied with the West, Moscow saw no reason to continue to subsidise it.
In October Yushchenko’s chief of staff, Oleh Rybachuk, was summoned to Moscow and given a stern warning: agree to the price hike, or your gas will be turned off. ‘Putin was warning us that this isn’t a threat, we’re not bluffing,’ Rybachuk recalls. ‘If we don’t do a deal by 1 January, our supplies will be cut.’20
Two days before the deadline, Putin offered a solution: a Russian commercial loan worth $3.6 billion to enable Ukraine to adjust to the new price. Yushchenko turned it down. On New Year’s Eve, Putin made another last-minute offer: a three-month price freeze if Kiev would agree to the higher price after that. Yushchenko said he would pay no more than $80. Early on New Year’s Day, Gazprom engineers turned the taps on the pipelines entering Ukraine, and the gas stopped flowing.
It stopped flowing to Europe too. Hungary and Poland quickly saw their supplies disrupted. The export pipelines should not have been affected, but Gazprom claimed the Ukrainians were stealing supplies from the transit routes to make up for the shortfall in its own deliveries. European governments were livid. Moscow claimed it had no choice, that it was a commercial dispute. But the West saw it as a strong-arm tactic, retribution for Kiev’s display of independence.
The European Commission summoned ministers back from their Christmas holiday to an emergency meeting on 4 January. But before they met it was suddenly announced that the Russian and Ukrainian presidents had reached a deal. On the face of it, the agreement was a decent compromise: Ukraine agreed to pay the market rate for Russian gas, but Gazprom would also sell it much cheaper gas from Turkmenistan, bringing the overall price down to $95 per 1,000 cubic metres; to sugar the pill Gazprom would also pay 47 per cent more to Ukraine for transporting gas to Europe.
The West’s new worries arose because all the gas would now be sold not directly by Gazprom but by a murky Swiss-registered trading company called Rosukrenergo, which was half-owned by Gazprom, partly owned by two shady Ukrainian businessmen. Rosukrenergo’s creation in July 2004 was overseen by Putin and ex-President Kuchma of Ukraine. Western observers could not understand why Yushchenko had now got involved with it.
The American ambassador John Herbst recalls: ‘The Ukrainians came in and described the deal. And I was dumbfounded. My German colleague and my other European colleagues were all dumbfounded. Because again we thought that the Ukrainians had a reasonable negotiating position and a reasonably strong one. And the result was less than optimal, to be diplomatic.’21
Damon Wilson described the consternation back in Washington: ‘Here we are with a president who presides over a deal with Russia that introduces Rosukrenergo, an intermediary with all sorts of shady transactions and dealings, in a process that, it became increasingly clear to us, was a vehicle for facilitating side payments, facilitating the worst of business practices in Ukraine. This was corruption at the heart of the Orange Government.’
Yushchenko’s chief of staff, Rybachuk, conceded it was a controversial deal, but they had no choice: ‘Yushchenko’s position was: Putin is president; yes I understand that gas is a dirty business but we can’t do business with Russia in any other way.’
So now Washington and Europe found their dreams fading. The Ukrainian democrat they had championed was proving to be decidedly flaky. Wilson
described it as a moment of disillusionment, of realisation that old habits were still strong in the “new Ukraine’. And in Moscow, Putin had demonstrated his willingness to use a weapon never tried before – energy supplies. Those few days of gas cuts in early January caused immense nervousness throughout Europe and triggered a radical rethink of the EU’s energy policies. From now on, Vladimir Putin was not a man the West enjoyed doing business with.
8
A NEW COLD WAR
Tempers get frayed
Now a spiral of disenchantment began to wreck relations between Washington and Moscow – and even between the ‘friends’, Bush and Putin, each of whom began to accuse the other of bad faith. At a bad-tempered summit in the capital of Slovakia, Bratislava, in February 2005 (just after the Orange Revolution), Putin pulled a pack of 3-by-5 cards from his inside jacket pocket – the Americans called them his ‘grievance cards’ – and began lecturing Bush about ... well, about how fed up he was being lectured to by the Americans. The rant went something like this: We’ve done everything we can to accommodate you, we supported you in the war on terror, we closed down bases, we let you destroy the ABM treaty without making a big fuss, we didn’t even let Iraq get between us, and what did we get in return? Nothing. You haven’t abolished Jackson-Vanik, you keep moving the goalposts on our WTO entry, you don’t even ratify the Conventional Forces in Europe arms control treaty, you want to build a missile shield that makes us vulnerable, and you’re trying to bring all our neighbours into NATO. Instead of praise for our policies aimed at reforming our economy and tying it into the world system, all we hear are complaints about our internal affairs – about human rights, about our supposed ‘backsliding’ on democracy, about Chechnya, about our media, about Khodorkovsky. When will it end?
Bush’s new national security adviser, Stephen Hadley, recalled that this was ‘probably the testiest meeting the two leaders had had’.1 It was here that Putin tried to turn the tables on Bush by claiming that America did not have a free press – as witnessed by the fact that Bush had allegedly had CBS’s senior news anchor Dan Rather fired for criticising him.2 Bush tried to explain that this was not the case, but Putin was in no mood to listen. Instead, he hit back on American democracy, too. The American people did not elect their president, Putin asserted, but an electoral college did. Bush replied: ‘Vladimir, don’t say that publicly whatever you do. You will just show everyone you don’t understand our system at all.’
Three months later there was a chance for reconciliation. Putin invited a host of world leaders to Moscow on 9 May to celebrate the 60th anniversary of the Allies’ victory over Nazi Germany. For the first time, an American president stood on the reviewing stand to observe a Soviet-style display of military might on Red Square. Putin appreciated the gesture (President Clinton had boycotted a similar parade ten years earlier in protest at the first Chechen war), but he did not like what went before or after it.
On his way to Moscow Bush had stopped in Riga, the capital of Latvia, where he sided fully with the Baltic nation’s interpretation of post-war history – namely, that the liberating Soviet army had overstayed its welcome and become an occupation force, replacing Nazi rule with another totalitarian regime. Soviet oppression in Europe, said Bush, was ‘one of the greatest wrongs of history’. The fact that the Baltic nations perceived Soviet ‘liberation’ as occupation is a truth the Russian government finds very hard to stomach, because, it claims, it insults the memory of Soviet servicemen who fought to free the country from the Nazis.
Even worse than his interpretation of the past was Bush’s gloss on the present. From Moscow he flew straight to Tbilisi, where the Georgians laid on a hero’s welcome and Bush reciprocated by calling the country a ‘beacon of liberty for this region and the world’ and apparently urging other former Soviet states to follow suit. He praised Georgia for providing troops in Afghanistan and Iraq, and proclaimed: ‘Your courage is inspiring democratic reformers and sending a message that echoes across the world – freedom will be the future of every nation and every people on earth.’ The words caused fury in the Kremlin, which was at that very moment tightening the screws on Georgia – banning imports of its world-famous wines and mineral waters on ‘health grounds’.
As 2005 progressed, and the West watched powerless as Putin curtailed democracy, created Nashi, cracked down on NGOs and turned off gas supplies to Ukraine, the rhetoric on both sides peaked. In early May 2006 Vice-President Dick Cheney travelled to another former Soviet Baltic republic, Lithuania, with the express purpose of delivering another broadside at Russia – one that was intended to be seen not as a wayward attack by a sometimes off-message vice-president, but as the considered view of the administration. Damon Wilson, at the National Security Council in the White House, explained: ‘We knew that this would be an important opportunity to continue to echo the president’s messages about the freedom agenda. There was a tendency often in Moscow to discount what Vice-President Cheney said, to say, this is Vice-President Cheney, we all know he’s radical, he’s the neocon in the administration, but at the end of the day, we’re doing business with President Bush. And so we worked very closely with the vice-president’s office and his speech writers to make sure that this wasn’t Vice-President Cheney out on a limb. We prepared a speech that was actually well vetted, very much circulated in the Interagency, delivering key messages on the democracy front, pretty tough-hitting words on what was happening in Russia.’3
Cheney delivered a paean to freedom and the spread of democracy, and let loose at the Putin regime:
In many areas of civil society – from religion and the news media, to advocacy groups and political parties – the government has unfairly and improperly restricted the rights of her people. Other actions by the Russian government have been counterproductive, and could begin to affect relations with other countries. No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolise transportation. And no one can justify actions that undermine the territorial integrity of a neighbour, or interfere with democratic movements.
He called on Russia to return to democratic reform, and become a ‘trusted friend’ by sharing the Western values: ‘We will make the case, clearly and confidently, that Russia has nothing to fear and everything to gain from having strong, stable democracies on its borders, and that by aligning with the West, Russia joins all of us on a course to prosperity and greatness.’ In a flagrant display of double standards, Cheney then flew to Kazakhstan where he praised the Putinesque dictatorship of President Nursultan Nazarbayev, expressing his ‘admiration for what has transpired here in Kazakhstan over the past 15 years, both in terms of economic development as well as political development.’
It was not the sort of thing that Vladimir Putin could let pass without comment. Six days later, in an address to parliament, he made a cryptic remark that left the Americans scratching their heads, although its target was clear. During a long passage devoted to the importance of the military, he snarled: ‘We can see what’s going on in the world. We can see it! As they say, “Comrade Wolf knows who to eat.” He keeps on eating, and listens to nobody. And apparently doesn’t intend to listen.’
The Russian foreign minister, Sergei Lavrov, traditionally suave and restrained, lost his cool at talks in the Waldorf Astoria Hotel in New York. The meeting was about Iran, which the US suspected was trying to build a nuclear weapons capability by developing civilian technology provided by the Russians. The previous year Russia agreed to join a troika of EU nations (the UK, France and Germany) plus the United States and China in elaborating a joint approach. At one point Moscow had helpfully suggested that it could enrich fuel for Iran’s as yet uncompleted Bushehr power station and have it shipped back to Russia. But in April 2006 the Russians announced the sale of an advanced air-defence system to Iran, infuriating the Americans.
Now, at the Waldorf, the six foreign ministers of the Iran group were explori
ng the possibility of sanctions against Iran. But after Cheney’s Vilnius speech the gloves were off. Condoleezza Rice and her political director Nicholas Burns faced an increasingly agitated Lavrov across the dinner table. Burns recalls: ‘Ordinarily in diplomacy people are polite to each other. And they don’t personalise things. But at some point, midway through the dinner, Lavrov became very red in the face and very angry, and kind of pounded on the table and attacked me over public statements I had made, objecting to Russia’s arms sales to Iran.’ Lavrov invoked Cheney’s speech and demanded that the Americans keep their criticisms to themselves. Burns was about to respond in kind, and Rice had to grip his arm to calm him.4
Such was the fraught atmosphere when the simmering conflict between Georgia and Russia erupted into violence. In September 2006 South Ossetian forces fired on a military helicopter carrying Georgia’s defence minister, Irakli Okruashvili, causing him to make an emergency landing. Okruashvili had earlier promised to celebrate the following New Year in the South Ossetian capital Tskhinvali – in other words, to accomplish the reincorporation of the region into Georgia by the end of 2006. Skirmishes broke out between Russian-armed South Ossetian soldiers and American-trained Georgians. Then, at the end of the month, Georgia arrested four Russian officers and accused them of espionage. International mediators were brought in, and after a few days the Russians were released – but not before they were paraded in front of television cameras, handcuffed and escorted by female Georgian police.
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