On August 4, 2000, truckloads of heavily armed men in black ski masks rolled up Bicycle Street. In broad daylight they forced their way past plant security and stormed the factory: truncheons and pistols drawn, AK-47 Kalashnikovs at their side. But these weren’t gangster thugs or Chechen terrorists—it was the Russian Federal Tax Police Service, and they were there to confiscate evidence of tax evasion.
Tax evasion? How could that be? The plant had just been hailed as “Russia’s Outstanding Taxpayer of 1999,” contributing $89 million in taxes on $142 million in profits. Plus, even after privatization, a controlling fifty-one percent stake in the factory was held by the Moscow city government of longtime mayor Yury Luzhkov.2
So—the government was not only charging its most heralded taxpayer with tax evasion but was actually raiding its own firm? What was really going on here?
International business reports dismissed it like so many business-related shoot-outs and mafiya drive-bys of Russia’s wild capitalist frontier under Boris Yeltsin. But Yeltsin was gone now, and his successor, Vladimir Putin, was intent on reining in the political and economic power Yeltsin devolved to others. So instead of cops versus crooks, or right versus wrong (in Russia, such absolute distinctions quickly get hazy), the drama on the Kristall factory floor was part of a larger Kremlin battle to recentralize power. Kristall was Moscow’s version of the local vodka monopolies that had become cash cows for struggling governors across Russia (see chapter 20). Thanks to Yeltsin’s goodwill toward his loyal mayor Luzhkov, even though the Kremlin retained the controlling fifty-one percent stake in Kristall after privatization, they allowed the mayor’s office to manage it and profit by it.3 That was all about to end.
Return To Center
“How can you govern a country with 246 different types of cheese?” French President Charles de Gaulle famously proclaimed in a moment of French exasperation with French politics. His apt précis weighed on later Russian commentators, who wondered how the newly elected President Putin could govern a country with 180 vodka producers from across the country making some five thousand (supposedly) different types of vodka, each of which had become “a business as profitable as diamonds or oil” for mafiosi and regional governments alike.4
Apparently Putin had a plan.
On the eve of the new millennium—December 31, 1999—a tottering Boris Yeltsin surprised the world by tearfully resigning as Russia’s first democratically elected president. His recently appointed Prime Minister Vladimir Putin would take his place until new elections could be held in March—elections that Putin would win in a landslide.
The iconic red-brick Kristall vodka factory in Moscow. ITAR-TASS/Vitaly Belousov.
On May 7, 2000, Putin strode confidently into the Kremlin’s opulent Andreyevsky Hall to take the oath of office. “We must not forget anything,” Putin boldly proclaimed in his inauguration speech. “We must know our history, know it as it really is, draw lessons from it and always remember those who created the Russian state, championed its dignity and made it a great, powerful and mighty state.”5
Of course, vodka politics helped to create the mighty Russian state but was also its Achilles heel. Now, at the depth of Russia’s economic despair, it seemed that Putin was eyeing vodka to make Russia great again. The day before his inauguration, Putin’s administration created Rosspirtprom (an acronym for “Russian Spirits Industry”) to centralize control over the dozens of vodka factories in which the federal government retained a controlling interest, with Kristall as the ultimate prize.6 Indeed, Rosspirtprom would become Putin’s first “national champion company.”
As Wellesley emeritus professor Marshall Goldman has explained, “these national champions would most likely be more than 50 percent owned by the Russian government” and “would put promotion of the state’s interest over profit maximization.”7 Just as industrial giants like Rosneft and Gazprom served the Kremlin’s interests in oil and natural gas (while making their Kremlin-appointed directors money hand over fist), Rosspirtprom came first, consolidating state control over the lucrative vodka market. “Vodka may not be gas or oil,” later explained the journal Ekspert, “but it too is a strategically important product. So important that to control its production it was necessary to create an alcohol equivalent of Gazprom.”8
In every case, building a “champion” meant first unseating the existing ownership. In their first attempt, the Kremlin instructed Kristall’s director, Yury Yermilov, to quietly buy up shares from employees. But instead of being transferred to the state, these stocks were shuffled to offshore shell accounts. “I admit that 19 percent of the stock belongs to an offshore company in Cyprus,” said Yermilov’s sweat-browed chief accountant Vladimir Svirsky. “But this is a friendly company, and the stocks never vanished: they are working for the collective.”9
Perhaps that would appease the feds. In the past, they had certainly looked the other way for worse. It was then revealed that, of the 700 million rubles that Kristall earned on domestic sales in 1999 (to say nothing of its lucrative Stolichnaya exports), the firm only reported earnings of 292 million rubles.
So—what happened to those other millions?
Time after time, the government-controlled board of directors attempted an audit. Time after time Yermilov headed them off—even using armed guards to bar entry to the plant. The board then elected a new director—Aleksandr Romanov (no relation)—to depose the corrupt Yermilov, who was now facing two to seven years in prison for tax fraud. Yermilov did what any upstanding businessman would do: he checked himself into a local hospital and bequeathed the job of factory director to his chief accountant Svirsky, who quickly hired a small army of shaved-head guards to hold off the auditors. But even they had to stand aside when the Federal Tax Police stormed in.10
Within minutes of the Tax Service raid of August 4, the state’s recently approved director Romanov—with his own personal army of some twenty Kalashnikov-toting officers—announced his arrival to “re-establish the state’s control” of the factory’s executive offices.11 While Romanov held the central offices, Svirsky’s troops occupied the rest of the factory. In addition to their guns, Svirsky defended himself with a local court ruling that invalidated Romanov’s election. And so, a farcical, months-long armed standoff ensued between Kristall’s two managers and their personal armies: Romanov’s in green fatigues, Svirsky’s in blue. Both managers refused to leave the premises. And still, the plant churned out its two million gallons of vodka every month like clockwork.
“I don’t know whose orders we’re obeying—some director or other. Maybe they’ll kick us all out,” dismissively lamented one assembly line worker. “We don’t talk about it, we don’t have time—we do everything manually, as you can see. We don’t have time, we have to make a lot of vodka—our job is to work, to work and that’s all.”12
Such indifference was not shared by the combatants. His phone lines having been cut by the blue opposition, Romanov hunkered down in his office day and night, afraid to leave. “I see many men with guns out there.”13
“I never saw such a situation as this,” one guard told a reporter, chuckling and nodding toward his rival down the way. Surrounded by journalists on the factory floor, Svirsky pleaded ignorance: “We’re giving the state and the country fuel, in the form of liquid energy (vodka), we pay our taxes—and all of the sudden they decide to change the leadership. We don’t understand what happened. There was a court decision and the court said [Romanov’s claim] was illegal.”14
Unaware of the Kremlin’s plans for a national-champion vodka company, Svirsky was blindsided. After a monthlong standoff across production lines of rattling vodka bottles, the Moscow court that previously annulled Romanov’s appointment suddenly—and suspiciously—reversed its decision and upheld the power of Romanov and the federal government. After weeks of futile appeals, armed with a court mandate and a local police battalion, Romanov swept the entire plant without incident. In one fell swoop, Svirsky was deposed, the plant was wre
stled out of Mayor Luzhkov’s hands and squarely put in the federal government’s pocket.15
Tax raids and confrontations soon became the standard operating procedure for Putin’s recentralization, often at the expense of the so-called oligarchs—the super-rich power brokers of the Yeltsin era—who would not play ball with the Kremlin. Closed-stock company Soyuzplodimport—the lucrative, former Soviet alcohol export agency held by Yeltsin-era oligarch (and Putin foe) Boris Berezovsky—was likewise investigated for fraud and embezzlement. Investigations into his shady business dealings pushed Berezovsky out of the inner circle of power and into self-imposed exile in London. “It looks as though the Federal Government is making it known that it intends to hold the vodka industry in its own hands and not allow anyone to compete,” wrote one Russian commentator: “not Yury Luzhkov, not Boris Berezovsky.”16
The vodka industry was among the first in line for recentralization, alongside the Media-MOST company of Vladimir Gusinsky. Not only had Gusinsky bankrolled Putin’s political opposition, but his independent television network, NTV, was openly critical of Putin’s government and the recently resumed Chechen war. Following the storming of NTV headquarters by the tax police, Gusinsky was pressured to sell to another state-controlled national champion, Gazprom. Within months, Russia’s main independent media outlet was back under state control, and Gusinsky fled into European exile.17
Gusinsky and Berezovsky were the first to violate Putin’s so-called “shashlik agreement.” In May 2000, Putin invited many of the Yeltsin-era oligarchs to his presidential dacha outside Moscow. Over shish-kebabs (shashlik), Putin reportedly laid down the rules: he would not mess with their businesses so long as these neo-boyars did not interfere in politics. Political apathy was acceptable—opposition was not.18
Moguls who did not fall in line fell victim to raids like those at NTV and Kristall. The interior ministry used chainsaws to break in the doors of Transneft—the state pipeline monopoly—to install its new president. Heavily armed troops forcibly ousted the director of the Kachkanar vanadium mine. In 2004, armed tax police raided the headquarters of oil giant Yukos after arresting its owner, Mikhail Khodorkovsky. At the time, Khodorkovsky was Russia’s richest man, and his political ambitions and seething distaste for Putin were hardly a secret. His company was broken up and renationalized while Khodorkovsky was convicted for fraud, embezzlement, and money laundering. The selective application of the law to a political opponent, lack of due process, harassment of his witnesses and lawyers, and the levying of additional, overlapping charges led the European Court of Human Rights to determine that Khodorkovsky’s human rights had been violated. Amnesty International named him a “prisoner of conscience.”19
Likewise, in 2007 tax authorities raided investment fund Hermitage Capital Management, which earlier had exposed instances of high-level government corruption. Hermitage lawyer Sergei Magnitsky was arrested and held for eleven months without trial (or medical treatment) until his death in police custody, prompting an international outcry.20 In her analysis of power networks and the sistema of informal governance in contemporary Russia, Alena Ledeneva describes such leveraging of “administrative resources” as an extreme form of corporate raiding, the primary difference being not only that such sistema raiding is the most hostile of hostile takeovers but also that such moves are undertaken for the benefit of well-connected government officials rather than the capitalist raiders themselves.21
Say what you will of the tactics, by the end of Putin’s second term as president in 2008, he had not only leveraged many Yeltsin-era cronies from power, but he had also recentralized many important sectors of the Russian economy, including vodka—or at least placed them in the hands of “useful friends” deemed to be more trustworthy members of Putin’s governing sistema.22
Who Is Vladimir Putin?
By interesting coincidence, Vladimir Putin’s grandfather was once a cook for Vladimir Lenin at the state’s country retreat. Spiridon Ivanovich Putin continued to work for Lenin’s widow, Nadezhda Krupskaya, after Lenin’s death. In the 1930s he cooked for Joseph Stalin at his dacha outside of Moscow, where some of the momentous, vodka-fueled dinners so vividly described by Nikita Khrushchev took place… and perhaps Putin’s “shashlik agreement” did, too.23
Spiridon’s son Vladimir was a hardened veteran of the brutal nine-hundred-day Nazi siege of Leningrad. Throughout the war and beyond, by Vladimir’s side was his wife Maria, who gave birth to Vladimir Vladimirovich Putin in 1952. The couple raised the boy with strict discipline. Occasionally rowdy at school, young Vlad was an ordinary kid who took an interest in sports—first boxing (which he quit after having his nose broken) and then judo. In his 2000 biography, First Person, Putin explained it was judo’s holistic combination of sport and philosophy that saved him from delinquency: “If I hadn’t gotten involved in sports, I’m not sure how my life would have turned out.”24
Putin graduated from Leningrad State University in 1975 with a degree in international law before joining the KGB. He married Lyudmila in 1983, and the couple had two daughters in Dresden, East Germany, where Putin was stationed from 1985 to 1990. In an interview for First Person, the family was asked about Putin’s temperament. Lyudmila replied that Vladimir wasn’t much of a drinker. “He is indifferent to alcohol, really,” she said. “In Germany, he loved to drink beer. But usually he’ll drink a little vodka or some cognac.”25
With the reunification of Germany, Putin returned to Russia to work for his former professor, Anatoly Sobchak, who became mayor of St. Petersburg. Confident, responsible, and reliable, Putin quickly rose within the mayor’s office. When Sobchak lost reelection in 1996, Putin was summoned to Moscow. In the Kremlin, Putin’s star continued to rise: from deputy chief of Yeltsin’s presidential staff he became head of the FSB (successor to the KGB) in 1998 and then prime minister on August 9, 1999. At Yeltsin’s traditionally well-lubricated official meetings and state banquets, Putin discreetly emptied his drinks into decorative flowerpots.26 By outward appearances, Putin was just another face card in the constant reshuffling of Yeltsin’s lame-duck administration—but in his memoirs, Yeltsin claimed that he had hoped to bequeath his legacy to Putin all along. “After all, I wasn’t offering him just any promotion,” Yeltsin writes, “I wanted to hand him the crown of Monomakh”—the traditional fur-lined, gem-encrusted crown of the grande princes of Muscovy.27
Days before Putin ascended to the ministership, Chechen insurgents besieged the Russian republic of Dagestan. By September, a series of suspicious (and still unsolved) apartment bombings in Moscow killed over three hundred, putting the entire country on edge. The natural reaction was to blame Chechen terrorists.28 Putin’s coarse response that he would “corner the bandits in the shit-house and wipe them out” showed assertive and sober leadership in stark contrast to the incapacitated Yeltsin.29 Rallying ’round their tricolor flag, the Russian people enthusiastically supported a resumed war in Chechnya as an anti-terror operation.
Putin’s star was rising in the economic sphere, too. The ruble devaluation and debt default in August 1998 instantly made Russian products more competitive on international markets. The price of Russia’s oil and natural gas exports—now under the control of Putin’s national champion companies—climbed uninterrupted for the next decade, buoying the economy with it. After the demodernization of the 1990s, Russia was finally picking up steam. Little by little, life was getting better. Not surprisingly, four months after Yeltsin installed Putin as interim president, he won the job outright with fifty-three percent of the nationwide vote in March of 2000.30
How do we understand the system that emerged during Putin’s first two terms as president (2000–2008)? Was it democracy with some autocratic traits? Autocracy with a veneer of democracy? Was it a market economy or a reversion to some sort of state socialism or even feudalism? Supporters hailed it as “Putinomics”; critics scorned it as “Putinism.”31 Whatever you call it, the defining characteristics were social stabilnost (st
ability), political centralization, and steady economic growth. Opponents would hasten to add: entrenched cronyism and corruption, a lack of transparency, the eroding of civil liberties, and a continuing disregard for public health. Still, how was this remarkable recentralization possible in such a short period of time?
A decade earlier, still under the Soviet umbrella, president of the Russian Republic Boris Yeltsin famously encouraged regional leaders to “take as much sovereignty as you can swallow” to weaken Soviet president Mikhail Gorbachev.32 Unfortunately for Yeltsin, this devolution of power from Moscow to the regions would be his inheritance, as governors built mini-fiefdoms—as in Pskov, often funded by vodka—at the expense of the center. While Yeltsin was unable to rein in the newly empowered governors, his successor Putin made it a top priority.
Under Yeltsin’s constitution—born of the shelling of the parliament in 1993—each of Russia’s eighty-nine regions appointed two delegates to the Federation Council, the flaccid upper house of parliament. Appointees included crooks, cronies, regional vodka producers, and even the governors themselves, who took advantage of their parliamentary immunity to live the high life in the capital.33 In the summer of 2000, again wielding the threat of criminal investigations, Putin expelled the governors and installed pliant replacements. At the same time as the tax raid on Kristall, Putin grouped all of the regions into seven “federal districts” to strengthen oversight of federal agencies across the country.
Critics quickly raised alarms that these federal representatives were collecting salacious, compromising materials—kompromat—on governors and regional power players to be used as blackmail should they deviate from Kremlin expectations. More importantly, the tax ministry set up interregional audit departments in each district—staffed by federal rather than regional appointees—to strictly monitor the governors’ compliance with tax laws.34 As with Kristall, accusations of tax evasion and corruption would be the pretext for raiding and reestablishing federal control.
Vodka Politics: Alcohol, Autocracy, and the Secret History of the Russian State Page 49