Vodka Politics_Alcohol, Autocracy, and the Secret History of the Russian State

by Mark Lawrence Schrad

  To unveil these projects, Putin made a dramatic pause in his 2006 State of the Nation Address from the opulent Marble Hall of the Kremlin.

  And now for the most important matter. What is most important for our country? The Defense Ministry [!] knows what is most important. Indeed, what I want to talk about is love, women, children. I want to talk about the family, about the most acute problem facing our country today—the demographic problem. The economic and social development issues our country faces today are closely interlinked to one simple question: who we are doing this all for? You know that our country’s population is declining by an average of almost 700,000 people a year. We have raised this issue on many occasions but have for the most part done very little to address it.60

  Before detailing new financial incentives to entice mothers to have second and third children, Putin quickly glossed over the most important factor: alcohol—noting only that “we are taking measures to prevent the import and production of bootleg alcohol.”61 Nothing more.

  This seemed like a massive oversight. For all of the advances under Putinism, Russia still suffered an epidemic of intoxication, yet Putin never formulated anything resembling an alcohol policy. “As long as a bottle of vodka costs the same as a kilo of apples, milk is more expensive than beer, and a packet of cigarettes is cheaper than chewing gum, you ought not to worry about a demographic crisis,” claimed Mikko Vieonen, representative of the World Health Organization in Moscow. “Under such circumstances, any country would have a demographic crisis.”62

  Russian alcohol experts pleaded with the Kremlin to do something: raise the drinking age, limit hours of sales, increase penalties for those selling alcohol to kids, clamp down on drunk drivers, home brewers, and third-shift vodka, increase funding for intensive care units, dispensaries, and alcohol rehabilitation programs, increase educational programs, restrict advertising… anything. Yet “not one of these measures was acted upon” under high Putinism. Meanwhile, as we shall see, efforts to consolidate control over the vodka market backfired spectacularly.63

  How can we account for such inaction? The standard trope, of course, is to fault a lack of political will. But as we have seen, there was extensive political will among those actually coping with the problem at the local level. As in any autocracy—the primary impediment to change is at the top. When his State Council presented him with a draft Concept of State Alcohol Policy, Putin simply laughed: “What? Do you want me to become another Ligachev?” By invoking the scapegoat for Mikhail Gorbachev’s disastrous anti-alcohol campaign, Putin ended all discussion.64 But discussed or not, Russia’s alcohol problem raged on.

  So we are faced with a paradox: with a treasury flush with oil and gas wealth, and possessing all the instruments of autocratic power, how could the seemingly omnipotent Putin be so powerless to confront his professed top political priority? For commentators like Lilia Shevtsova, the answer boils down to power. “It is not that Putin does not want to realize his pet projects,” such as alcohol and the demographic imbalance, but rather that “the interests of the ruling caste force leaders to concentrate only on what is important for its survival.”65 In other words—as it has been for generations of Russian vodka politics—so long as sobriety and health conflict with the economic interests of the autocratic system, they will be kicked to the side.

  Meanwhile, Back On Bicycle Street…

  At the end of his first presidential term just as at its beginning, the business side of Putin’s vodka politics was most evident back at the red-brick Kristall compound. The storied factory was to be the crown jewel of Rosspirtprom—a state-run national champion conglomerate created on the eve of Putin’s inauguration. Putin tapped two men to rein in the world’s most lucrative vodka market: Sergei Zivenko and Arkady Rotenberg. Who were they, and what qualified them for such important (and incredibly lucrative) positions?

  As it turns out, Rotenberg had been Putin’s close friend for some forty years, dating from their childhood judo competitions back in Leningrad. In the pre-Putin 1990s Rotenberg was a mildly successful businessman who enjoyed promoting judo. By 1998 he had become director of St. Petersburg’s elite judo club, Yawara-Neva, with his buddy Vladimir Putin its honorary president. “I am the CEO, but it’s the brainchild of Vladimir Putin,” Rotenberg later admitted. “It was his idea.”66 In 1999 Rotenberg started a business relationship with Zivenko—another nondescript thirty-something businessman with an interest in the alcohol trade, despite only ever getting drunk once in high school, while seeing his friend off to the military.67 Yet within months these inexperienced businessmen were entrusted with controlling Russia’s most lucrative market. How?

  In a recent interview Putin’s top advisor Andrei Illarionov described how the Rosspirtprom decision went down. After hearing only secondhand that the “primary and most important stream of federal finances” had been bequeathed to Putin’s “clan,” Illarionov dialed up Alexei Kudrin—acclaimed austerity hawk and Putin’s decade-long Minister of Finance—to see if he knew anything. He didn’t. Minister of Economic Trade and Development German Gref likewise had heard nothing of this huge decision. “I soon realized that for Putin, there are two distinctly separate groups of people,” said Illarionov, “let’s call them the ‘economics group’ versus the ‘business people.’ With the one group—Kudrin, Gref, and me—Putin discussed issues of the general economy; while with the help of the other, he seized control over property and financial flows.”68

  What happened once the trade was in their hands? By the end of Putin’s first term Rosspirtprom holdings controlled over forty-five percent of the legal vodka market, worth more than two billion dollars annually, largely through corporate raiding and back-room arm twisting. Trying to get Russians off samogon and third-shift vodka and get them back on the state-sanctioned stuff won Zivenko many enemies in the tumultuous vodka underground. They placed a six-million-dollar bounty on his head. Even at his office he retained an armed security detail.69 Yet, as he confided to Viktor Erofeyev in 2002, he was only a thorn in the side of those who preferred disorder in the alcohol market.

  Shortly thereafter he was investigated by the Accounts Chamber and fired. But don’t feel sorry for Sergei Zivenko—as the short blurb in his Forbes 100 profile explains, he “hit the jackpot” as director of Rosspirtprom. And though he “only stayed in the job two years, he put the experience to good use.” In those two short years he went from middling businessman to one of the richest men in Russia, with a net worth of $220 million—not too shabby. Then—along with his other Rosspirtprom managers—Zivenko simply moved down the line: creating the so-called Kristall Trade and Industrial Group, which produces the premium (and potentially copyright infringing) Cristall Black Label, with annual revenues of $400 million.70 Yet that is nothing compared to Putin’s judo partner, Arkady Rotenberg.

  Not long ago the Russian business newspaper Kommersant’ sat down with the reclusive Rotenberg: “In 1998, you led the sports club Yawara-Neva, with Vladimir Putin as its honorary president,” began the interview. “And here within a relatively short time, you’ve become a big businessman with substantial assets across the country and in various sectors of the economy. Is it just a coincidence?”

  “I understand the subtext of your question,” Rotenberg replied. “Knowing high-level government officials has never been an impediment to business in our country, but it is hardly a guarantee of success. After all, Putin knows far more people than those who have become famous and successful today.”71 Instead, he claimed it was the philosophy of judo that produced his good fortune—first by heading Rosspirtprom and then parlaying that into creating the successful SMP Bank with his brother Boris. By the end of Putin’s second term Rotenberg had bought up the companies that built lucrative pipelines for Gazprom. From such humble beginnings in the dojo, through heading the national champions Rosspirtprom and Gazprom, Rotenberg has a net worth estimated by Forbes of $1.1 billion.72

  Rotenberg seems to embody a core element of Russia�
�s ruling sistema whereby useful friends become appointed millionaires—making quick fortunes in the private sector while serving the interests of powerful individuals in the government through their informal ties of trust and loyalty.73

  Even downplaying direct connections, Putin’s indirect effect was unquestionable. Whether as tribute or opportunism, in 2003 a new vodka brand rolled off the production line at Kristall: Putinka. Just like vodka is the diminutive for Russia’s “little water,” Putinka is Russia’s “little Putin” in a bottle. Adoring Russians drank it up, quickly becoming Russia’s second most popular brand. Even in a country with surprisingly little brand loyalty, Putinka maintained its dominance over the next decade—raking in the equivalent of $500 million annually, as the Kristall plant churned out more than eight million bottles monthly. For his part, Putin has repeatedly scoffed at the commercialization of his legacy, but at least when it comes to vodka, he’s done surprisingly little to confront it.74

  Rosspirtprom’s privileged position looked to get even better through a series of laws on alcohol production aimed at reducing the “rampant corruption, illegal activity and extremely high rates of alcohol poisonings” and signed by Putin in 2005.75 Effective January 1, 2006, alcoholic beverages could only be sold with new government excise stamps. All production facilities were required to have new monitoring and accounting equipment and could only be licensed if they were not behind in paying their taxes. Such regulations would clamp down on illicit production, squeeze out small producers, and further consolidate the market for Putin’s national champion—all in the name of quality control. Instead, the bungled implementation by a corrupt bureaucracy had the opposite effect—dealing a death blow not only to thousands of Russian consumers but ultimately to Rosspirtprom itself.

  “The end result of the laws and resolutions was a farce,” claimed Dr. Aleksandr Nemtsov.76 The new excise stamps hadn’t even been printed in time. By the time they were shipped to producers, including Rosspirtprom, their facilities had been idle for weeks or even months. The government scrambled to extend deadlines, but the entire market was in chaos. With liquor stores suddenly empty, thirsty Russians turned to the very illegal producers that the Kremlin had hoped to crush while decimating the company it had planned to strengthen.

  The human consequences were the most apparent: many hard-up drinkers reverted to quaffing industrial solvents, antifreeze and the like, while third-shift producers made vodka from similar industrial poisons. With tragic predictability, the spring and summer of 2006 saw a nationwide epidemic of fatal alcohol poisonings. In many countries authorities can declare a state of emergency for widespread civil unrest or acute natural disaster: in Russia, four regions (including the beleaguered governor of Pskov) imposed a state of emergency for bad vodka.77

  The fiasco gutted state-run Rosspirtprom. An audit by the Federal Accounts Chamber concluded that Rosspirtprom’s “financial condition as of 2007 can be characterized as a crisis, in which the company is on the verge of complete bankruptcy.”78 What happened to this once-mighty national champion—the keeper of Kristall and producer of Putinka—that enriched both oligarch and government alike?

  For one, much like other national champions, such as Gazprom, Rosspirtprom was overextended and willing to absorb debts by selling its product on credit, especially if it advanced the Kremlin’s strategic interests. This would be a problem only if there was a sudden need for cash. Second, the company’s production lines stood idle from January through March of 2006 while the government tried to clean up its stamp mess. Rosspirtprom made mostly inexpensive vodkas—which when combined with a healthy amount of government taxes, left little profit margin to recoup those lost revenues.

  Third—and perhaps most importantly—new regulations required upfront payment from retailers and distributors rather than credit. Suddenly there was that need for cash, and the company couldn’t get it fast enough. When distributors were unable to pay upfront, Rosspirtprom was left holding the bag. With no money on hand they couldn’t even pay their tax bills—another no-no according to the new regulations. With its tax arrears mounting, in July 2006 the Federal Tax Service suspended Rosspirtprom’s license, crippling the addled giant even further with another $13 million in losses.79

  Letting Rosspirtprom collapse would have been an embarrassment for Putin: a lucrative national champion suddenly careens into bankruptcy thanks to a disastrously implemented Kremlin policy. Instead, a five-billion-ruble ($165 million) bailout was orchestrated by major state-run bank VTB or Vneshtorgbank. With Finance Minister Kudrin chairing its board of directors, VTB later became a favored target of anti-corruption crusader Alexei Navalny. “VTB is a very good reflection of how business in Russia occurs today,” explained one banking insider, “which is on the one hand state ownership and on the other direction by individuals who are much more concerned about their own wealth than about the benefit to the country or the owners of the institution.”80

  In this instance the VTB loan allowed Rosspirtprom to pay its tax bill owed to the government (from which it received the bailout) and enabled it to re-start production. Meanwhile, we can only speculate whether those assembly lines actually stood idle all those months or whether the usual third-shift production simply expanded into the first two shifts as well.

  While the bailout saved Rosspirtprom from sudden death, it doomed it to a slow, imminent demise. According to the Accounts Chamber, even though the company sold off assets and its most famous trademarks, the thin profit margins led to a “pitiable state of affairs” in which the company could not pay its massive debts, interest on loans, or even its bills. This is how botched government reforms fatally poisoned both scores of Russians and the country’s single largest vodka producer. Unfathomably, Rosspirtprom could no longer turn a profit selling vodka to Russians.81

  With Rosspirtprom unable to meet its loan payments, VTB reluctantly disassembled the company, taking control of the various parcels, including the red-brick Kristall factory.82 Like a foreclosed home, a bankrupt factory is of little use to a bank. The Kremlin-controlled VTB needed a loyal investor to take one for the team and buy up these toxic assets. They found another well-connected oligarch, Vasily Anisimov.

  A battle-tested veteran of the “wild east” of mafiya capitalism in the 1990s, Anisimov masterminded the purchase of nonferrous metals at low, state-subsidized prices and sold them at immense profit on world markets. By 1994 he was vice-president of Rossiisky Kredit Bank, where he bought up lucrative metals firms and exported aluminum with the help of Marc Rich—the fugitive Belgian commodities trader infamously pardoned by President Bill Clinton.83 At the end of Putin’s first term in 2004, Forbes estimated Anisimov’s wealth at $350 million. By the end of his second term, Anisimov had topped $4 billion.84 Certainly he had benefited tremendously from Putinomics.

  Anisimov’s oldest daughter had been brutally murdered in Ekaterinburg in the 1990s, prompting Vasily to send his family to the “backup airfields” of the United States: “If you’re flying high and President Putin decides to confiscate your property, you know you’ve got somewhere to land,” explained one Russian businessman. Living the high life of a billionaire heiress in New York, Anisimov’s teenage daughter Anna soon drew comparisons to Paris Hilton. Together the Anisimovs bonded over developing high-end real estate in Manhattan and the Hamptons.85

  Back in Russia, Vasily continued to diversify his interests… into vodka. In 2009 he purchased from VTB the Rosspirtprom properties languishing in bankruptcy for five billion rubles (the amount of the original bailout loan), which included fifty-one percent control over Kristall. In 2010 he upped his stake in Kristall to eighty-six percent, making him the biggest player in the vodka market alongside Putin’s judo partner, Arkady Rotenberg. Of course it is difficult to speculate whether the purchase was informally dictated by the Kremlin, but it is telling that in February 2010 Anisimov got the Putin seal of approval: he was made president of the Russian Judo Federation, even though he never participated in ju
do or expressed an interest in it.86

  Equally telling: in his public pronouncements Anisimov seemed indifferent to his new multi-billion-ruble vodka empire, dourly intending, he said, to “bring order to the [alcohol] factories.” In a 2010 interview he explained, “We only took them in order to make money.” With a shake of his head he added: “troublesome product.”87

  For many factories this meant reorganization. But a different fate awaited the iconic Kristall factory on Samokatnaya ulitsa, a plant that had been integral to centuries of Russian vodka politics. In 2012 Anisimov announced plans to dismantle the factory and relocate the production facilities to a cheaper plot on the outskirts of Moscow. Having spent much time and money investing in properties in the American market, Anisimov apparently determined that the 8.6 hectares occupied by the storied factory on the banks of the Yauza were just too valuable to pass up. And so—that is how the most iconic landmark in the history of Russian vodka is to be transformed into high-end condominiums.88