Russians

by Gregory Feifer

  Some of the siloviki, who are among Russia’s newest rich, helped the Kremlin reestablish its control of the economy by taking over private companies. Sechin himself was responsible for orchestrating the downfall of the largest loser in that process, who was once the country’s wealthiest oligarch. Mikhail Khodorkovsky rapidly assembled a massive empire in the 1990s by intimidating his rivals and sometimes diluting the shares of major stakeholders to take control of his many businesses. But although he was known as one of the most ruthless oligarchs by the time he put together the Yukos oil company, his reputation improved after he’d cemented his control of the firm. Khodorkovsky was among the first to hire European accountants to bring the company’s practices up to Western standards. Investing in infrastructure and equipment to improve production was also rare in an environment where capitalism often meant seizing or stealing as much profit as quickly as possible—perhaps a somewhat understandable perception, given the generations who grew up on propaganda portraying that as the free market’s basic operating principle.

  After a decade of decline brought on by the Soviet collapse, oil production began to recover thanks in no small part to new techniques imported by a handful of Texas oilmen who brought new fracking and other extraction methods to Russia. As the Georgetown University scholar Thane Gustafson has made clear, no company was more receptive than Yukos, whose pioneering work soon made it number one.6 The new culture of maximizing productivity clashed with the old Soviet way of doing things, however. Khodorkovsky deployed legions of young, laptop-wielding executives to ensure Yukos’s wells were pumping out as much as they were supposed to by cutting out waste and rooting out double bookkeeping. Slowed by massive bureaucracy that virtually ruled out innovation, the old establishment saw him as a serious threat.

  Already disliked by his business peers, the upstart broke more rules by criticizing Putin, who planned to reestablish state control over the all-important oil industry after he became president in 2000. The multibillionaire seriously angered the Kremlin by lobbying parliament to privatize Russia’s network of pipelines, at the time, the government’s last remaining means of exercising control.

  In April 2003, Khodorkovsky announced that Yukos would merge with another top oil company, Sibneft, to create a firm whose reserves would rival the biggest multinationals’. He was also huddling with ExxonMobil and ChevronTexaco, which were interested in buying stakes in the new enterprise. Khodorkovsky, who openly bankrolled liberal opposition parties and set up a prominent charitable foundation, was seen as a menace more than a mere nuisance. In October, masked special forces officers stormed his plane on a S iberian runway and arrested him.

  Tried and sentenced for fraud and tax evasion, the once haughty tycoon came to be seen by many Russians as a symbol of the ruin faced by those who opposed or resisted Putin. After he was sent to serve an eight-year term in Chita, a desolate Siberian city four thousand miles east of Moscow, Yukos was dismantled and most of its assets sold to a scarcely known company with a temporary address in another provincial city. That company, the single bidder in a highly suspect auction, soon resold the properties to Sechin’s Rosneft, the state oil firm Putin was transforming into the country’s largest and most powerful. Although the Kremlin hadn’t outright seized Yukos, its flimsy legal cover fooled few. The message was unmistakable: private businesses, no matter how big and powerful, would remain private only if the state approved.

  In the spring of 2009, Khodorkovsky was returned to Moscow for another trial on a new charge that even some of his critics considered absurd: that the owner of Yukos had stolen twenty-five billion dollars, nearly the company’s entire income, over a period of six years. The second trial was held in a shabby courthouse on a quiet downtown street next to a park. Its panoramic view includes the Moscow River and the White House, the seat of government where Putin—who, then between his second and third presidential terms, was serving as prime minister—had his offices. Although the public had long lost interest in Khodorkovsky, his supporters, who included prominent dissidents and a few celebrities, stood in line to observe the charade of justice in the second-floor courtroom. I joined them on a day so beautiful it seemed to buoy even the spirits of Khodorkovsky’s elderly parents, who attended most days.

  At the top of the stairs, a platoon of tough-looking men with shaved heads and black flak jackets guarded the room with Kalashnikovs while Khodorkovsky sat in a cage of thick bulletproof glass. Dressed in a brown cotton jacket and Soviet-looking jeans, he looked fit but grayer than at his first trial, as would be expected after his years in Siberia. Looking up from talks with his lawyers, who included some of the country’s most prominent human rights defenders, he occasionally smiled.

  Grim-faced prosecutors in ill-fitting military-style uniforms opened the proceedings by reading the charges in barely audible monotones that put even one of the accusers to sleep. Taking notes and studying documents through his rimless eyeglasses, Khodorkovsky seemed almost irrelevant, a curiosity in his cage who surely knew that one of the show trial’s chief purposes was to further humiliate him. But although his expression sometimes seemed to hint of mocking the proceedings, he also played along, as if in mad hope the court could somehow be influenced. Hours of prosecutorial droning, including reading every word of many Yukos contracts, pushed the mood in the cramped room toward despondency. By the time the prosecutors moved on to reciting minutes of shareholders’ meetings, I was fidgeting less from the pain of sitting on one of the unforgiving plastic benches than the discomfort of witnessing the banal machinery of authoritarianism plodding toward an inevitable outcome. The judge announced a recess only after a guard had begun snoring.

  “You don’t know a thing about the system until you’ve found yourself in its claws,” Khodorkovsky wrote during his trial, describing it as “a single enterprise, whose business is legalized violence.”7 Found guilty of course, he was sentenced to an additional six years in prison. They probably won’t be his last. In 2013, state-controlled NTV television aired a documentary alleging that Khodorkovsky took part in the murder of a Siberian mayor in the 1990s. Many believe the film was groundwork for a third criminal case against him.

  Although he stands out as a symbol of injustice, Khodorkovsky is hardly an isolated case: in the space of a decade, one of every six businessmen in Russia faced some form of prosecution.8 Around the time of his second trial, I met billionaire Victor Makushin, the founder of a scrap-metal empire who confirmed that upper bureaucrats’ success in taking back the better part of Russia’s oil industry emboldened them to appropriate a larger slice of all pies by demanding ever-bigger kickbacks and bribes. That, Makushin stated, made the overseers of Putin’s regime the country’s predominant criminal group. “Officials have amassed huge powers,” he said in his modest office on the grounds of a Moscow factory. “They represent the greatest threat to business, and you can’t turn to the courts for relief because judges are afraid of ruling against the authorities. It’s a huge drag on the economy.”

  Soon after I spoke to him, Makushin was charged with criminal activities and fled abroad. If any doubt about the motives existed, he was blocked by officials from seeking bankruptcy, which would have protected his company after it was forced to stop production. He could only look on as Sberbank, the state savings bank, which happened to have loaned his once booming enterprise $63 million months before the surprise charges were filed, took it over. At the time, the governor of the southern Stavropol region bragged to Putin that he had prohibited Makushin from closing one of his plants there, which again prevented him from filing for bankruptcy.9 His case demonstrates that the siloviki and others in the Kremlin are less interested in the economy than in their tap on it. Just as Soviet leaders cared more about their control of the socialist system than addressing its massive inefficiencies, the current ones are more intent on preserving their cut of Russia’s form of capitalism than improving it. The results of a 2012 poll that revealed more than half of respondents believed they could n
ot protect their property from possible takeover were no surprise.10

  Alekperov talked about the government and its problems in a kind of code. As the country’s biggest private oilman at a time when the state was continuing to acquire oil assets in one strong-arm way or another, his position uncomfortably resembled Khodorkovsky’s before he was imprisoned. Lukoil had even developed plans to emulate Yukos’s aggressive business model before Khodorkovsky’s arrest prompted Alekperov to drop them. Although the former Soviet oilman doubtless shares the industry’s overwhelming distaste for Khodorkovsky, Lukoil’s CEO said he would make no judgments. “I’m sure our legal practices are transparent enough and I hope the right decisions will be made… But I knew Mikhail personally, respect and sympathize with him. From the very beginning, I said of course he should be punished if he’s guilty. But the court determines what the punishment should be, not I.”

  Alekperov had reason to be concerned. Soon after state-owned Rosneft had swallowed most of Yukos, it began targeting lucrative Lukoil oil fields in the country’s Arctic far north. Those assets, like many in Russia, lie beneath some of the world’s least hospitable terrain, in that case the remote Nenets Autonomous region.

  Alexei Barinov, an oil executive turned politician, was the last regional governor to take office in Russia before Putin abolished gubernatorial elections in favor of Kremlin appointments in 2005. The following year, he was charged with fraud and embezzlement in connection with a previous job he had held. That happened after the region’s local legislators, in a rare show of defiance, butted heads with the Kremlin by unanimously refusing to approve Putin’s decision to sack the region’s representative to Russia’s upper house of parliament.

  Declaring that the interference in Nenets came from people whose interests “don’t correspond to the interests of the region or its government,” Barinov declined to keep the legislators in line. Arrested the following day, he was quickly fired. However, some locals were convinced his apparent political defiance was just an excuse to throttle him over the real reason for his ouster: he was protecting Lukoil’s local subsidiary, which he’d headed in his previous job. Nenets residents—many of whom praised Barinov for financing schools and libraries—said their former governor’s transgression lay in opposing Rosneft’s moves to assume control of Lukoil fields in the region. His tactic was delaying deals between the two companies while insisting Rosneft pay nine hundred million rubles ($33 million) it owed in back taxes.

  Some Nenets residents compared Barinov’s arrest to Khodorkovsky’s. Most appeared resigned to their region’s fate. An earnest regional legislator named Nikolai Fomin explained that Barinov’s arrest was part of a carefully planned Kremlin scheme to dismantle the local government and take control of the region’s oil and gas reserves. “Our example sent a signal to all governors,” Fomin said in his cramped office in what passes for Naryan-Mar’s town center. “The signal was that if you don’t play by the rules they invented, the same’s in store for you.” In that case, Fomin continued, the Kremlin counted on the isolation of Nenets to execute its corporate takeover. “We’re located at the end of the earth. So a few people go out and yell on the tundra, will anyone hear us?”

  Back in Moscow, Alekperov rolled with the punches. No one at Lukoil said anything publicly about the loss of its northern oil fields, nor was anything done to shore up Barinov. Deferential as before, Alekperov professed to feel no pressure from the government. Competition for oil licenses might be more open and more understandable, he said, with more companies competing. However, “Lukoil gets its licenses for developing its fields from the state, which has the right to determine how its property is exploited; to enact whatever regulations it sees fit.” The state’s belief that a number of oil fields should be considered strategic was “understandable,” since it will make them available to future generations. “Their availability will wait until more oil is needed or there’s more money to develop them.”

  Alekperov’s doormat tactic has paid off. Apparently on good terms with the Kremlin, he’s often seen with Putin. The one possible development Alekperov admitted to fearing is the “undoing” of the competition in Russia’s oil industry, which began in the 1990s. After I spoke with him, domination by a single company, as in the gas industry, became reality when Rosneft announced it would buy BP’s joint venture with a Russian oil firm called TNK, which would boost the Kremlin’s share of the world’s largest oil industry from 40 percent to more than 50 percent and cement Putin’s drive to put the energy industry back in state hands.

  That development—and the Kremlin’s influence over businessmen it wants to do its bidding in general—has implications abroad, where Moscow uses its vast natural resources as an instrument of foreign policy. A “transnational oil company,” as it describes itself, Lukoil is already the largest source of direct Russian investment abroad and predicts that half its business will soon be conducted outside the country.

  More than simply to consolidate power at home, Putin has used control over the energy sector to pursue his goal of restoring Russia to the ranks of the great powers, along the lines he outlined in his doctoral thesis in 1997. His logic is simple: the more countries depend on Russia for their energy needs, the more leverage Moscow has over them. The Kremlin hopes Europe’s current reliance on Russia for a third of its natural gas will inevitably grow as demand inexorably increases. For now, beyond simply exporting energy, Russia is using companies such as Lukoil and its state natural gas monopoly Gazprom to buy control of pipelines, utilities and other infrastructure that delivers Russian energy directly to European consumers.

  Those worried by the inroads Russian companies have made in Europe warn that, unlike Western firms, which lobby largely in their own interests, Russian companies, both state-controlled and private, play an important role in Kremlin strategizing. Increasing control over foreign energy industries not only generates larger profits for Moscow but also helps cultivate political influence in target countries—more, according to Harvard University’s Marshall Goldman, than the Red Army did during the Cold War. “The Russians have that weapon,” he told me at the height of Gazprom’s wealth in 2008, “and there’s nothing you can do to counter it.”

  Former Czech president Vaclav Havel raised the same alarm about the drive to reestablish influence in former Soviet Bloc countries. Before his death in 2011, Havel told me that “Russian companies are undoubtedly influencing the behavior of various Czech political parties and politicians. I’ve seen several cases where the influence started quietly, then slowly began projecting onto our foreign policy. I can only advise serious discretion and great caution.” In 2009, Havel led a group of prominent Central and Eastern European politicians who published an open letter directing that message to President Obama. The West, they wrote, should abandon its mistaken belief that the end of the Cold War and the expansion of the EU and NATO into the former Soviet Bloc guarantees their countries are “safe.”

  Moscow’s success has been dramatic during the past several years. Goldman said the threat from its control over the European energy market was made clear when Moscow shut off gas to Ukraine during a price dispute in 2006, which disrupted supplies to Western Europe. “It intimidates, and in a sense, it neutralizes the country,” he said. “If you look at Germany’s policies after that incident, they become much more timid in challenging some of the things countries might do that would upset the Russians.”

  The 2008 campaign of the administration of George W. Bush to put Ukraine and Georgia on a path to NATO membership provoked fury in Moscow. Despite international outrage over Russia’s summer invasion of Georgia months earlier, German chancellor Angela Merkel—whose country gets more than 40 percent of its natural gas from Russia—led the opposition to Washington’s plan, which was defeated. At the same time, Germany blocked proposed European Union regulations that would have restricted foreign companies from buying European energy utilities, a policy that could have slowed Gazprom’s advance into Western Europ
e.

  That kind of acquiescence appeared to begin changing in 2012, when the European Commission launched a major investigation into Gazprom’s anticompetitive practices in eight European countries. At the time of this writing, the case promised to force Gazprom to lower its prices, which would be especially threatening for Moscow at a time when supplies from new and diverse sources, such as American shale gas, and the development of liquefied natural gas are significantly depressing prices. Backed by new EU regulations and resolve, Eastern European countries have begun taking back control of their pipelines by breaking up their energy utilities—a major threat to Gazprom, which is responsible for providing up to 20 percent of the government’s revenues and a major source of Putin’s influence in the world. Since 2008, Gazprom’s market capitalization of more than $360 billion—which fueled confident predictions the company would become the world’s largest by that measure—has declined to below $80 billion. Despite the looming clouds for Gazprom, however, Russia has stuck to its old strategy of pouring billions of dollars into the construction of pipelines to Europe and other tactics it hopes will lock in European customers. Far from integrating into Western institutions, as many hoped in the 1990s, Moscow is continuing to wage a new kind of Cold War with new kinds of maneuvering. Although it’s nowhere as threatening as it used to be, the Western disinclination to publicly acknowledge the conflict has helped undermine attempts to develop a common European policy toward Russia, another factor in Moscow’s successes.