Putin acted to limit the autonomy of all the oligarchs, not just those who had media holdings, whom he sought to destroy and drive from the country. On July 11 the procurator general demanded $140 million from Vladimir Potanin for underpaying the government when Norilsk Nickel was privatized; Potanin was co-owner of Izvestiya with Vagit Alekperov, owner of Lukoil, who was charged with tax evasion. Authorities also brought charges of tax evasion against AvtoVAZ in July for underpaying $600 million; this was the beginning of a series of moves against Berezovskiy. In response Duma member Boris Nemtsov organized a meeting between Putin and the oligarchs on July 28 seeking clarification of the new rules of the game. Nemtsov had been deputy prime minister under Yel’tsin, a member of Parliament at various times, and cofounder of the pro-business Union of Right Forces, and he was on good terms with the Yel’tsin oligarchs. Subsequent reports suggested that at that meeting Putin and the oligarchs agreed that the results of the 1990s privatizations would not be overturned and there would be no confiscation of assets, ill-gotten or otherwise, from those oligarchs who stayed out of opposition politics. Participants also say the oligarchs got an agreement that they would all be subject to the same rules and treated equally, an evident reference to the oligarchs who were not there: Berezovskiy and Gusinskiy, who were clearly on their way out, and Roman Abramovich, whose star was so ascendant that he didn’t even attend the meeting. Anatoliy Chubays was strangely also absent, listed as being out of the country despite the fact that he had pushed for a meeting even earlier, saying, “Every issue should be clarified at that meeting. A question must be asked and answered as to whether the authorities have changed their mind or what is going to be done about the initiative of overzealous law enforcement officers,” referring to the raids and arrests that had recently taken place.36 After the meeting Nemtsov stated, “Today’s meeting draws a line under ten years of the initial accumulation of capital. . . . The era of the oligarchs is over.”37 But this statement didn’t apply to all oligarchs, and especially not to Abramovich, who later provided a very sanguine view of Putin’s beneficence: “President Putin made it clear that he would support business to develop Russia’s economy. In return for this support and business certainty, we needed to contribute taxes and act responsibly and transparently.”38 The statement from the Kremlin was more direct: “The president guarantees his support and comprehensive assistance to companies and banks proceeding in their activity guided by the government’s interests.”39
Abramovich, who previously had relied on Berezovskiy for access to the Yel’tsin Family, now himself could open the gates to the Kremlin, as revealed by the 2011 legal case between Berezovskiy and Abramovich in London. It became clear very early in 2000 that Abramovich enjoyed an excellent relationship with Putin and that he would get special treatment from the Kremlin in the future. Berezovskiy testified in London that after Putin’s October 1999 birthday party, to which Abramovich was the lone “big businessman” invited, Abramovich had approached Berezovskiy about contributing to the purchase of a yacht for Putin, the total cost of which would be $50 million. Berezovskiy claims to have declined (politically perhaps not a smart move), but the yacht, the Olympia, was ordered and was allegedly added to the presidential fleet in 2002.40 Novaya gazeta ran a three-part investigative series on the yacht, confirming its existence and that it was commissioned in the Dutch shipyard of Papendrecht on April 25, 2002, according to Lloyd’s Ship Register. In 2005 the newspaper estimated that over the previous five years the total amount spent on the “recreational presidential fleet” was $78 million to $84 million, while the amount budgeted during this period was $2.4 million.41 The London courts heard testimony in 2010 from Dmitriy Skarga, who had worked for Gennadiy Timchenko (subsequently named in U.S. government sanctions for his financial links to Putin), Yevgeniy Malov, and Andrey Katkov at Kinex (one of the first companies to get an export license from Putin’s Committee for Foreign Liaison in St. Petersburg). At age twenty-nine Skarga had been appointed to head Sovcomflot, Russia’s state-owned and largest maritime shipping company.V In that capacity Skarga testified that he had met Christopher Bonehill in Geneva in 2002–3, where “they discussed a yacht which had been presented to Mr. Putin and was being managed by Unicom.”43 An investigation by Novaya gazeta revealed that the Lloyd’s Shipping Register provided the following information: the yacht was initially owned by Ironstone Investments, registered in the Channel Islands, and then by Ironstone Marine Investments Ltd., registered in the British Virgin Islands. It was managed throughout by Unicom Management Services, registered in Cyprus.44 Unicom, headed by presidential aide Igor Shuvalov, is a 100 percent state-owned subsidiary of Sovcomflot, and the yacht’s cost was $47.6 million, or equal to one-third of the annual budget for the entire city of Sochi.45 It was guarded by Zolotov’s Presidential Protection Service. Novaya gazeta concluded, “So, the mystery has been solved. Olympia is a presidential yacht.”46
In the 2011 London trial, both Berezovskiy and Abramovich testified that the Kremlin message Abramovich brought to Berezovskiy was that if Berezovskiy didn’t sell his shares in ORT, he would be subject to imprisonment. Abramovich had previously paid Berezovskiy to provide protection (krysha) and Kremlin access, but beginning in 2000 the roles were reversed: now it was Abramovich who acted as a Kremlin envoy, pressing Berezovskiy to comply with the new rules of the game. Berezovskiy insisted on meeting Putin directly, and when they met in the Kremlin in August, Berezovskiy understood that his only choice was to accept a buyout on Abramovich’s (and the Kremlin’s) terms or face prison. It was their final meeting; it was clear to Berezovskiy that he had to leave Russia.47 Abramovich stated that he gave Berezovskiy $305 million not so much as a buyout but because “I wanted him to be able to establish himself properly abroad.”48
This episode confirmed that under the Putin plan, the state would be strengthened not by breaking up the oligarchic system per se but by transforming an oligarchy independent of and more powerful than the state into a corporatist structure in which oligarchs served at the pleasure of state officials, who themselves gained and exercised economic control over these structures, both for the state and for themselves. This raises the prospect that state officials promoted the interests of a private economy, not just to serve some principle, not just to fill state coffers with tax revenue, but to help themselves. It was Abramovich who was sent to Berezovskiy to inform him of the new rules of the game, not Russian tax inspectors or the procurator general.
Putin’s “Prime Personal Project”: Gazprom
Intrinsic to Putin’s desire to move beyond the influence of Yel’tsin’s inner circle was the plan to take over Gazprom, which had served as a major source of revenue for the Kremlin in the 1990s. At that time Gazprom had received shares in oligarch-owned companies as surety against loans that the oligarchs never intended to repay. In this way Gazprom is estimated to have loaned over $1 billion to Gusinskiy alone, and as a result it ended up owning 30 percent of Gusinskiy’s Media-Most company. This was not a problem under Yel’tsin, who allowed both independent media and independent oligarchic power. But in terms of corporate governance, it was not the best way to run one of the world’s largest energy companies. As Ben Judah and many other keen observers of the energy sector observed, during the Yel’tsin period Gazprom “seemed to be investing in everything apart from its own pipelines and reserves. It was being used like a giant government slush fund and not a natural resource company.”49
Under Yel’tsin Gazprom was led by Rem Vyakhirev as CEO and former prime minister Viktor Chernomyrdin as chairman of the board. Neither was particularly loyal to Putin, and there is considerable evidence that both were highly corrupt, including the fact that Gazprom steered $1 billion in contracts to Stroytransgaz, a company that was 50 percent owned by Gazprom managers and relatives, including Vyakhirev’s daughter.50 The second quality—personal accumulation of corruptly obtained wealth—would be allowable under Putin, but never the first, disloyalty.
Putin increased
his influence over Gazprom’s board of directors immediately upon being elected by removing Chernomyrdin, who was sent off to become ambassador to Ukraine. He was replaced as chairman by Dmitriy Medvedev, who had been Putin’s legal advisor in Petersburg, headed his electoral campaign, and had become first deputy head of the Presidential Administration. Putin then began to move against Vyakhirev but was not able to remove him until 2001. Putin personally attended the Gazprom meeting on May 30, 2001, and in a six-minute address informed the startled board that he was instructing the five government-nominated directors to replace Vyakhirev with Aleksey Miller, a deputy minister of energy and Putin’s St. Petersburg coworker; he suggested that the other six board members back Miller too.51 Vyakhirev was temporarily kicked upstairs to become chairman of the board, with Medvedev becoming his deputy, but he soon was retired.52 Medvedev remained chairman until he was elected Russia’s president in 2008.
Within Putin’s first years, more members of his clan would be placed on the Gazprom board. By 2008 eleven of the eighteen members of the board were people who had their career start in the St. Petersburg administration, the Petersburg Port Authority, other St. Petersburg companies, or the FSB. As Nemtsov and Milov (both former energy ministers) commented, “This is not the typical way in which global energy companies are run. Usually, leading positions are occupied by professionals with years of experience in top management in energy corporations. Former small-time regional bureaucrats, port and building company managers do not usually get given top management positions in major oil-and-gas corporations, especially in such numbers.”53 By all accounts, from the beginning Putin treated Miller as a mere adjutant and took a personal interest in the company’s performance, its policies (particularly in terms of gas supply to Russia’s neighbors), and the distribution of its profits.54
His master’s voice. Putin with his two energy lieutenants—both of whom rose with him from St. Petersburg—Aleksey Miller of Gazprom in the center and Igor Sechin of Rosneft on the right. Moscow 2009. Photo by Sergey Karpukhin, Reuters
Installing Medvedev as chairman of the board gave Putin direct access to the board’s decisions and deliberations. As early as 2000, the government and expert community began to discuss the need for Gazprom to buy back shares that had been divested to subsidiaries that had underperformed and dragged down share prices. These discussions resulted in the buyback of 4.8 percent of Gazprom shares from Stroytransgaz. Boris Nemtsov (minister of fuel and energy in the Yel’tsin government) and Vladimir Milov (deputy minister of energy in the first Putin term) subsequently claimed that, having been bought back, these shares “began to mysteriously disappear. The process was gradual but anyone who wishes to do so can see how it went by looking at Gazprom’s Quarterly Reports prepared to international accounting standards. . . . 6.4% of Gazprom’s shares have somehow fallen off its balance sheet. . . . Little by little . . . a large dollop of Gazprom shares has vanished from its subsidiaries’ books. Where did they go? No one knows. . . . The market value of such a holding is in the region of $20 billion. . . . The dividends on such a holding, based on Gazprom’s 2007 distribution, is over $170 million a year.”55
The board also moved to strengthen its holdings in core Gazprom stock and to sell its shares in non-energy-related subsidiaries. But as with the buyback of shares from Stroytransgaz, transactions were often not transparent and did not always financially benefit Gazprom’s bottom line. Thus SOGAZ, Gazprom’s insurance company, was sold for $120 million to a consortium that included Bank Rossiya, despite its value being estimated as at least ten times higher.56 Subsequently 51 percent was sold to a company called Abros, a 100 percent–owned subsidiary of Bank Rossiya, and another 12.5 percent to a company called Accept Ltd, which owned 3.93 percent of Bank Rossiya and was itself owned by Mikhayl Shelomov, the son of a cousin of Putin.57 SOGAZ’s income from premiums alone rose to $1.5 billion in 2007 as state-owned companies were put under “administrative pressure” to use SOGAZ for their insurance, including the Russian Railways, run by Vladimir Yakunin, who was one of the founders of the Ozero Cooperative.58
Gazprom is also alleged to have bought up Abramovich’s share of stock at an inflated price, thus allowing the government to gain a majority interest (which they supported), but at a rate that cost the state $6.5 billion, an act that raised the question of whether this was not a “criminal waste of state funds.”59 Of greatest concern to global minority shareholders, such as Hermitage Capital’s Bill Browder, was that certain business decisions appeared to benefit the personal interests of the board members, not the shareholders.
Particularly troubling to independent board members was the emergence of intermediary companies like ITERA, a gas trading company set up in the mid-1990s that also appeared to be stacked with Gazprom officials and family members and that received gas from Gazprom at low prices and sold it internationally at high prices, denying Gazprom and its shareholders a substantial profit. For example, in 1999 Gazprom sold ITERA a 32 percent stake in a gas-producing subsidiary, Purgaz, for only 32,000 rubles ($1,041), despite the fact that PricewaterhouseCoopers—Gazprom’s own auditors—valued the deal at $200 million to $400 million. In June 2000 Putin himself acknowledged financial irregularities under the previous team: “We know that enormous amounts of money were misspent.” Now the onus would be on Putin, Medvedev, and Miller to clean up Gazprom’s act.60 In 2001 Miller, who had started to clean out the stables, stated that Gazprom would exercise its option to buy back a 32 percent stake in Purgaz, giving markets hope that Putin and the new team at Gazprom would protect their investments more carefully.61
However, the objective problem for Russian leaders was that, as a result of this chronic mismanagement, Gazprom’s stock price was depressed relative to its market valuation. So it needed to do something to improve its performance. It quickly moved to eliminate ITERA, but instead of selling gas directly to buyers overseas, a second intermediary company emerged, Eural Trans Gaz. Eventually allegations of corrupt practices and links with organized crime began to circulate, including in an anonymous document sent to governments in the Organisation for Economic Co-operation and Development (OECD).62 The public version of the document criticized Gazprom for using intermediary companies like Eural Trans Gaz to “extract value from the company.” This practice led to widespread claims by Russian and Western observers that Eural Trans Gaz, Putin’s answer to ITERA, was “connected with Semyon Mogilevich, a major international organized criminal residing in Moscow, and top officials in Putin’s administration,” and that “the Putin administration had revealed itself. Its aim was not to clean up Russian business but to transfer the skimmed profits to its own people.”63 This practice began immediately after Miller and Medvedev took over Gazprom and was in full operation by 2003. Nemtsov and Milov estimated that asset stripping alone, which was meant to boost reserves in core holdings for exploration of future gas fields, actually cost the company $60 billion.64
Lest it appear that all big business throughout Russia was engaged in skimming and asset stripping at this time, Yukos (owned by Mikhayl Khodorkovskiy) and Sibneft (owned by Roman Abramovich) massively increased their assets during the same period, leading to the recovery of the oil sector.65
Evidently Putin’s obsession with his image as an incorruptible leader did not get in the way of his helping his friends and Ozero colleagues to capture the commanding heights of the economy. But how to keep the opposition from publicizing this information? The media had to be silenced, and in the summer of 2000 his attention turned to Boris Berezovskiy.
The Sinking of the Kursk and the Takedown of Boris Berezovskiy
Putin’s first months in office had seen an impressive display of adroit surprise attacks on his opponents. In August 2000, though he had earned a break, he was not to get it. In the first week a bomb planted in a metro underpass in central Moscow, killing eight, reminded the population that no number of antiterrorist actions in the Caucasus would entirely remove the threat they lived under.
> Then, on the same day Putin departed for a vacation on the Black Sea in Sochi, naval exercises in the northernmost Barents Sea got under way. The pride of the Russian fleet, the recently commissioned nuclear-powered submarine Kursk, took part in the maneuvers, reportedly carrying aboard both dummy torpedoes and top-secret, experimental Shkval advanced torpedoes. In the course of the maneuvers, one of the dummy torpedoes appears to have misfired, leading to an even larger second explosion, possibly of a Shkval, sending the ship to the bottom with its full crew on board.VI This was August 12.
Putin’s clumsy and callous management of this tragedy taught him the harsh realities of presidential leadership, particularly the need for deft and sensitive handling of crises and the limits of imposing a strict “vertical of power” that paralyzes decision making at lower levels. He did not interrupt his vacation; he neither returned to Moscow nor flew to the control center in Murmansk to take charge of crisis management. While the dying men tapped out desperate messages from within the dark and disabled submarine that were picked up by Russian and foreign rescue vessels, Putin was pictured in short-sleeve shirts, relaxing and smiling in Sochi as he greeted visitors. The radio station Ekho Moskvy, allied with NTV, reported that 73 percent of listeners thought Putin should have flown to the scene of the rescue mission.67 Marina Litvinovich worked for Gleb Pavlovskiy’s Fund for Effective Politics at this time, the institute where Putin’s “image” was created. She was also editor in chief of the Kremlin-connected Strana.ru. She recounts that she was “on call” that weekend and personally intervened to try to get Putin to interrupt his Sochi vacation because of the bad PR he was getting. She alleges that both of her superiors, Voloshin and Oleg Dobrodeyev, were drunk when they first got the news, so it fell on her to advocate for Putin going to Vidyayevo, the naval base where Kursk was based. In a subsequent interview, after falling out with the Fund and the Kremlin, she recounted:
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