Petrostate:Putin, Power, and the New Russia

by Marshall I. Goldman

  TABLE 5.2 Vladimir Putin Elected President March 2000; Quickly Begins Purges to Create National Champions

  Appointed by Yeltsin as deputy prime minister of Russia in mid-1992, Chernomyrdin made sure that in his absence Gazprom was well provided for. Rem Vyakhirev, who had served under Chernomyrdin as vice chairman of the Ministry of the Gas Industry, succeeded Chernomyrdin at Gazprom and in mid-1992 became its CEO. A few months later Yeltsin promoted Chernomyrdin to the post of Russia’s prime minister. Given the incestuousness of all these arrangements, it was not much of a surprise to learn that Gazprom under Vyakhirev became one of the largest financial angels backing Chernomyrdin’s party in the December 1995 election for the Duma. It did the same a few months later in June 1996 when Yeltsin ran for reelection as president. Reflecting the closeness of their relationship, wags transformed Chernomyrdin’s party slogan, “Nash Dom, Vash Dom (Our Home, Your Home),” into “Nash Dom, Gazprom (Our Home, Gazprom).”

  By March 1998, Yeltsin had begun to suspect that Chernomyrdin was taking his job for granted and on a growing number of occasions had begun to act as if he were president, not Yeltsin. Consequently, Yeltsin removed him as prime minister. To soften the blow, Yeltsin made Chernomyrdin chairman of Gazprom, a homecoming of sorts. That was all pre-Putin.

  The care and feeding of the Gazprom executives that characterized the Yeltsin and Chernomyrdin years changed abruptly in June 2000 after Putin won election as president. At the time it did not seem as though Putin was accomplishing very much, but looking back at his first year in office, the firing of Chernomyrdin that June was just the kickoff of a concerted campaign.

  During the same month, Putin also went after the first of the “upstart” or non-”nomenclatura” oligarchs (see Table 5.2). For the most part, these were newly rich oligarchs who in Soviet days had never been included in the party or government hierarchy, officially referred to as the nomenclatura. In fact, most had one non-Russian parent and in some cases should not have been listed as Russian on their internal passports, an important prerequisite for anyone in Russia seeking inclusion on the nomenclatura list that identified who was important in the Soviet Union. And as we saw, many had also been involved in private or black market activities—what the Soviet Union classified at the time as “economic crimes.”

  RECLAIM THE TV NETWORKS

  One of Putin’s first targets among this group was Vladimir Gusinsky. He headed Media-Most, a media company that encompassed NTV, the country’s largest private TV network, as well as several newspapers and magazines. Gusinsky had created that media empire in just a few years. To a Kremlin unused to a TV network that was not controlled by the state, Gusinsky had a well-deserved reputation in the Kremlin as “a pain in the neck.” Yeltsin was the first to feel his bite. Gusinsky’s NTV was particularly critical of the Yeltsin government’s 1994 war with the Chechens. In retaliation, in December 1994 Yeltsin’s bodyguards, led by Alexander Korzhakov, physically attacked Gusinsky’s bodyguards, forcing them to lie in the snow outside Gusinsky’s office in what became known as “the faces in the snow” incident. But as angry as Yeltsin and his family were over the way they were criticized and satirized by NTV, particularly in Kukely, a weekly puppet television show, Yeltsin never moved to close Gusinsky’s company or jail him.

  As Gusinsky would soon learn, Putin had a much thinner skin. After Putin sent troops back into Chechnia in 1999, NTV resumed its criticism—only this time Putin, not Yeltsin, was the target. Gusinsky understood there was a change in leadership and understood there was a risk to him and his media empire. In a conversation in Moscow in March 2000, the week before Putin was elected president, Gusinsky acknowledged to a group of us from the Jamestown Foundation that such outspoken criticism of Putin might cause problems for him, his staff, and his network. But he and one of his senior assistants insisted at a late-night dinner before Putin’s expected victory that they would not pull their punches.

  Perhaps they should have. Three months later in June 2000, only just installed as president, Putin had Gusinsky arrested on charges of embezzling funds from a St. Petersburg company.

  STAY OUT OF POLITICS

  In contrast to Yeltsin’s tolerance of criticism, Putin summoned twenty-one of the country’s new oligarchs to a Kremlin meeting convened the next month on July 28, 2000. Neither Gusinsky nor Berezovsky was invited. Had they been there, they would have heard Putin tell those in attendance that if they kept out of politics, he would leave them alone and not question how they had managed to accumulate so much wealth so quickly. His message was an implicit warning to avoid Gusinsky-type attacks in the media and interference with Putin’s policies in the Duma. Most of the oligarchs got the message and paid heed to Putin’s warnings.

  Two oligarchs, Boris Berezovsky and Mikhail Khodorkovsky, did not. Even though he was not there in person, Berezovsky quickly learned of Putin’s warnings, but typical of the arrogance of the oligarchs who rose to affluence in the Yeltsin years, Berezovsky acted as if it made no difference. When Russia’s nuclear submarine Kursk sank in August the following month, ORT, the TV network Berezovsky controlled, joined with Gusinsky’s NTV (Gusinsky had been released from jail) to criticize the accident and the government’s belated response to it. ORT made a special point of interviewing the bereaved families of the dead sailors in their drab quarters in Vidyayevo, the submarine’s home port on the Barents Sea. Where, the families wanted to know, were Putin and other senior government officials? Why weren’t they at the scene of the accident? Both ORT and NTV provided the answers with video shots of Putin enjoying himself on vacation outside his home along the ritzier Black Sea. That did it. Now Berezovsky and Gusinsky were in serious trouble. Soon after, Media-Most, Gusinsky’s holding company, was seized from him (ostensibly for his failure to repay a loan). He then fled to Spain and into exile in the United States and Israel.

  Berezovsky can be forgiven for thinking that he would not become a Putin target. As one of Putin’s original backers for the post of prime minister, Berezovsky evidently assumed that as a minimum, out of gratitude, Putin would not turn on him. After all, before all this trouble began, Berezovsky had even gone so far as to welcome Putin and his family as houseguests in Berezovsky’s mansion on the French Riviera.12 Moreover, Berezovsky had been close to Yeltsin’s family and other senior officials in the Kremlin. He had become a financial supporter and confidante to Yeltsin’s daughters and their husbands. Berezovsky made one of them, Valery Okulov, the CEO of Aeroflot. That in large part explains why they, in turn, agreed to set aside Sibneft, a petroleum complex in one of the Loan for Shares auctions so that Berezovsky would emerge as the dominant owner. Berezovsky, in turn, agreed to use some of the revenue from Sibneft in an off-the-books pass-through to underwrite Kremlin expenditures and Yeltsin’s 1996 campaign for reelection.

  Berezovsky’s biggest mistake, however, was that he allowed ORT to join with NTV in its various attacks on Putin. Eventually that set off rumors that Putin had put out an order for Berezovsky’s arrest. Taking the hint, Berezovsky fled to London and surrendered control of his media assets as well as his petroleum company, Sibneft, to what had been his junior partner, Roman Abramovich. Abramovich, in turn, was happy to be cooperative and graciously put them at Putin’s disposal. In a few months, state-owned Gazprom took possession of Gusinsky’s company Media Most and Berezovsky’s Sibneft, in effect nationalizing them both. Putin’s national champions were quickly beginning to take shape.

  RECLAIM GAZPROM

  The next year in May 2001, Putin continued his campaign by asserting firmer control over state-controlled Gazprom. He did this by using the Gazprom stock owned by the state to vote to oust Vyakhirev as CEO. With the removal of both Chernomyrdin and Vyakhirev and their replacement with Dmitri Medvedev and Alexei Miller, two younger bureaucrats who had worked with Putin in St. Petersburg, Putin was now in a position to halt the blatant asset stripping that had characterized Chernomyrdin and Vyakhirev’s almost decade-long raid on Gazprom, the compan
y they were supposedly leading.

  One of the most brazen examples of this asset stripping was the way Gazprom executives aided and abetted the formation of ITERA. This company soon became the second largest producer of natural gas in Russia. ITERA stands out because although its main business was in Russia, it was headquartered in Jacksonville, Florida. As far as is known, Jacksonville was picked because it is warmer than Moscow and because the CEO, Igor Makarov, had a Russian friend who emigrated to Florida and suggested that Makarov open an office nearby. In retrospect it was probably a safer place than Moscow for a company that on occasion (even if unfairly) has been accused of asset stripping. No one in Jacksonville seemed particularly upset that ITERA’s assets had been stripped from Gazprom nor did they seem to care that according to rumors that may have been part of a campaign of disinformation to discredit ITERA, almost all the trustees of ITERA seemed to be close relatives or mistresses of senior Gazprom executives. As of this writing, the identity of those trustees has not been published. That was nothing unusual in the Yeltsin era.

  Putin’s ouster of Chernomyrdin and Vyakhirev from Gazprom plus his subsequent removal in March 2002 of Viktor Gerashchenko as chairman of the Russian Central Bank were all efforts to halt such banditry and punish what Putin saw as mismanagement and the personal pillaging of state assets. (In the case of Gerashchenko, he had been accused of misusing the powers of Russia’s Central Bank.) All three—Gerashchenko, Chernomyrdin, and Vyakhirev—had been long-serving state officials, and all had begun their careers in the Soviet era and had become members of the nomenclatura, the Soviet bureaucratic elite. With their removal, ITERA soon lost most of its contracts and in a short time it surrendered its position as Russia’s second largest producer of natural gas to another firm, Novatek.

  Putin’s purge of Gusinsky and Berezovsky was of a different nature. Both were viewed as upstarts from the murkier side of the street. Unlike Chernomyrdin, Vyakhirev, and Gerashchenko, neither Gusinsky nor Berezovsky had served as a senior government official in the Soviet era. Nor were Gusinsky and Berezovsky ethnic Russians. Although Berezovsky had an advanced degree in economics, like so many upstart oligarchs he began building his wealth as a trader. Gusinsky emerged from the black market of the Soviet era—an economic criminal by Soviet standards. Berezovsky had been closely involved with criminal groups as well. Neither would ever have been allowed into the upper ranks of the Communist Party. They had not come up through the system like Chernomyrdin, Vyakhirev, and Gerashchenko. Gusinsky and Berezovsky were both at least partly Jewish and were not “ole boys” or part of the Soviet nomenclatura. Both sets of men had enriched themselves at the expense of the state, but somehow the excesses of Chernomyrdin and Vyakhirev at Gazprom and Gerashchenko at Gosbank were not regarded as venal and therefore not punishable with imprisonment or exile (apparatchiks will be apparatchiks, and besides, they are ours). Conversely, Gusinsky and Berezovsky—most definitely not “ours”—were both either imprisoned or threatened with imprisonment.

  THE ATTACK ON YUKOS

  This distinction about status in the Soviet era, even if subtle, also helps explain the arrest of Mikhail Khodorkovsky. The attacks on Yukos and Mikhail Khodorkovsky highlight Putin’s determined effort to reign in these upstart oligarchs and at the same time renationalize and refashion their property into state companies and his vaunted national champions. By 2003, with the earlier arrests and firings, it should have been clear just what Putin was attempting to do. Yet Khodorkovsky, by his actions and his hubris, acted as if he were invulnerable. At the time, Forbes Magazine estimated that his net worth amounted to $15 billion, which made him the richest man in Russia. This may have warped his judgment and made him think he was indeed invulnerable.

  Khodorkovksy’s rise to fortune and infamy began when he was a student at the Medeleev Chemical Technical Institute. Taking advantage of the new 1987 Gorbachev-era reform authorizing the creation of private businesses, Khodorokovsky, along with twelve classmates, opened a cooperative coffee house and discotheque, which they called Menatep (this stood for Intersectoral Center of Scientific Technical Progress). They soon expanded their activities to sell consumer goods such as computers and other products that were in short supply. Trading proved to be very profitable, and all the cash they had accumulated allowed them to open their own bank the following year. This was made possible in 1987 by another Gorbachev reform that authorized the formation of private banks, the first time since the Revolution. Eventually, they named the bank Menatep, the same as their cooperative.

  As one of the first private commercial banks in Russia, Menatep was in a key position in 1992 to buy up the vouchers that President Boris Yeltsin decided to issue to every Russian. The vouchers, in turn, could be exchanged for shares of stock in the thousands of heretofore state-owned enterprises that were then being privatized. The intent was to make every Russian a stockholder, a true case of people’s capitalism. The hope was to involve each Russian in the privatization process and so give each one a stake in the new market system.

  But as we saw, few Russians had any appreciation for the value of their vouchers. The voucher system, however, was made to order for economic sophisticates like Khodorkovsky and his banking associates who understood the potential of the vouchers. They quickly bought up as many as they could. In a few months, their vouchers enabled them to accumulate a large corporate empire.

  Khodorkovsky’s biggest acquisition, however, came when he managed to gain control of the oil company Yukos. This was a by-product of the Loans for Shares scheme described in Chapter 3. To help the government pay its bills, Khodorkovsky’s Menatep, along with several other banks, offered to lend the government the money it needed. As collateral for its loan, Menatep agreed to take the government’s stock in Yukos, a petroleum company that had been spun out of Rosneft in November 1992. Incidentally, the name “Yukos” reflected the merger of the Production Association Yuganskneftegaz (Yu) with the refinery KuybyshevnefteOrgSintez (Kos).13 When the government could not pay back its loan, Menatep proceeded to auction off its collateral, as it was allowed to do. The assumption was that a fair auction would fetch a price high enough to provide the state with funds not only to repay the loan to Menatep but also to generate additional income for the government. What happened, of course, was that the December 8, 1995, auction was rigged. As with the other auctions, viable competitors were prevented from bidding so that the winner was, in fact, a “straw” put up by Menatep, which conducted the auction. This way, despite higher bids from Alfabank, Inkombank, and Russian Credit Bank, all of which Menatep had ruled out on a technicality, Khodorkovsky was able to pay only a bit more than $350 million, the required minimum price for control of 88 percent of Yukos stock. A few months later Yukos would have a market value of $3–5 billion.14

  It was disturbing enough for the public to learn how these one-time state properties had been acquired by Khodorkovsky and a dozen or so other oligarchs at a fraction of their value, but to make matters worse, it happened at the same time the Russian economy was all but disintegrating. Between 1990 and 1998, as the country moved into shock therapy and simultaneously closed down much of the military-industrial complex, the GDP shrank by 40–50 percent. Not only were a few oligarchs taking out a gigantic piece of the economic pie for themselves but the pie itself had shrunk to barely half of what it had been before Yeltsin rose to power. That is why by 1998, more than one-third of the population found itself below the poverty line.

  This was not the only controversial action taken by Khodorkovsky and his associates on their way to control of Yukos. Khodorkovsky and Menatep did not control all the stock in Yukos nor in the Yukos subsidiaries that produced the oil. Other investors had also purchased vouchers and exchanged them for shares, which they now owned. One of the most adventurous investors was a foreigner, Kenneth Dart, an American who was an heir to the Dart Cup business. He put in approximately $2 billion to purchase shares in Yuganskneftegaz and other subsidiaries of Yukos. Khodorkovsky wanted D
art out. Consequently, Khodorkovsky stripped Yuganskneftegaz of its value in the expectation that Dart would conclude he should sell out while there was still some value to his investment. To nudge him along, Khodorkovsky ordered that the petroleum produced by Yuganskneftegaz should be sold at below or close to cost to another subsidiary more closely controlled by Khodorkovsky. This second subsidiary would then sell the petroleum at the higher market price and thereby capture all the profit. This so-called transfer pricing is a common way to squeeze out minority shareholders (it is also a way of trying to reduce taxes for the first subsidiary) such as Dart, even if it means bringing a company like Yuganskneftegaz to the brink of bankruptcy. Subsequently, Dart initiated a series of lawsuits in an effort to recoup his investments. Despite some success, Dart estimates he lost over $1 billion.15

  Something similar happened after Menatep closed its doors in the wake of the financial crisis of August 17, 1998. Those with deposits in Menatep as well as the foreign companies and banks that had provided loans to Menatep lost almost all their money. But while outsiders were left with little or nothing, Khodorkovsky, as we saw, transferred the bank’s assets that still had value to another, but independent, subsidy in St. Petersburg called Menatep St. Petersburg.

  As troubling as such behavior is, it was the physical violence, including murder, allegedly carried out by several Yukos officials that was the most disturbing. That at least was what the judges decided in March 2005 when they found Alexei Pichugin, head of Yukos security, guilty of murder and sentenced him to twenty years in prison. (In August 2007 the sentence was extended to life in prison.) In addition, Leonid Nevzlin, one of Khodorkovsky’s closest associates who is now exiled in Israel, was also charged with being Pichugin’s accomplice in similar crimes.16 Given how dependent the judges in the Yukos case were on Putin, there is reason to question just how impartial the judges could be. Khodorkovsky’s lawyers, in fact, claim that one of the judges would excuse herself periodically to seek advice from the Kremlin about how to rule.