Ben Judah - Fragile Empire - How Russia Fell in and Out of Love With Vladimir Putin

It is impossible to say precisely which of the arguments that was being advanced by Sechin through various people ended up being the decisive one for Putin to arrest me. Most likely he was dared to – or be exposed as a weakling.

The arrest was the defining act. It imposed the Putin consensus on the oligarchs. The rival political patron was finished. It established once and for all that Putin would not tolerate open challenges to the executive. It made it clear that the presidency had powers akin to a tsar. It was Putin’s 1929, his 1988, his 1993. Within the government not everyone was pleased with this new turn. Kasyanov in particular continued to speak out against the arrest until January 2004. This was not appreciated:

At the next cabinet meeting, he [Putin] made us sit there for more than an hour while the prosecutor read out all the charges against Khodorkovsky, as if hearing them spoken proved their legitimacy. All the cabinet members sat there stone-faced, with no clue why it was being done. As for me, I couldn’t keep from cracking a smile now and then as I listened to the blatant absurdities and fabrications. And, of course, throughout Putin was closely watching the reaction of the cabinet members, and mine was the only one at variance. When it ended, of course, nobody had any questions or comments, and everybody walked out in silence. 43

Out in western Siberia the arrests continued. To show that Khodorkovsky was never coming back, more than 370 Yukos workers were hauled before the police. Then the nationalizations began. This, according to Putin, is why: ‘I want to say once again that the state should manage only the property it needs to carry out its public functions, ensure state power and guarantee the country’s security and defence policy.’ Reality was cruder. When threatened by Berezovsky and Gusinsky, the President had grabbed what made them powerful – their assets. Now, he nationalized Khodorkovsky’s resources.

To the despair of men like Kasyanov, this remade Russia as an economy and a state. Putin allies started to ‘double-hat’ on the boards of big state companies. All talk of the privatization of the state oil giant Rosneft vanished. Within two years, the share of Russian GDP produced by private enterprise fell from 70 per cent to 65 per cent. 44Within four years the share of Russian oil production in private hands fell from 90 per cent to 45 per cent. 45

More importantly the Yukos affair established who the oil boom would fuel – the state. There would be no more ‘lobbying’. By 2005 the state was taking 83.8 per cent of oil companies’ profits in tax, where in 1999 it had taken just 45.1 per cent. 46By the end of the decade, mass tax avoidance from the oil companies was a thing of the past and the Kremlin was taking in over 90 per cent of their profits as taxes. 47

Not only had Putin seized oil rents back from the oligarchy, the state had seized a huge share of the assets. Corporate stock controlled by the government jumped from 11 per cent in 2003 to 40 per cent in 2007. 48Berezovsky had boasted that seven oligarchs controlled over 50 per cent of Russian GDP (who in reality controlled around 15 per cent) but in 2006 it was five government officials who chaired companies that produced 33 per cent. 49They had become the oligarchs.

The losers inside the government were the free-market types and the Yeltsin-era officials such as Kasyanov and Voloshin. The winners were the ‘siloviks’, the Russian for those who command ‘sila’ or strength – military and security men. The others that came out on top were the St Petersburg team that had stuck magnetically to their boss under pressure, even the neoliberals such as Alexey Kudrin. The dramatic weakening of Kremlin liberals was clear to Khodorkovsky:

The main thing for Sechin was the abrupt weakening of the democratic wing of the President’s retinue, with a simultaneous strengthening of the role of repressive mechanisms in running the country. Thus it was that he is the one who became the main principal beneficiary of the changes that took place as a result of the ‘Yukos trial’.

The former oligarch is not the only person to argue that conservative forces inside the Kremlin wanted to take his personal wealth and return it to state hands, where they could embezzle from it with ease. Prominent conservatives admit former KGB agents in the government were pushing for nationalizations. ‘More or less, those that favoured more state control of the economy were the siloviks,’ reminisced Grigory Rapota, a former lieutenant general in Russian foreign intelligence, a minister at the time.

Yet the tycoon repeatedly said they offered him the chance to go on ‘one knee’ and keep his company, until almost the very end. His failure to do so unlocked the door for Sechin and his men. The renationalization of Northern Oil, which Khodorkovsky had criticized in the Kremlin, was thus the first of many.

The great turn sent a clear message to the oligarchs not to interfere in politics – and to foreign investors that Russia was no level playing field. The arrest warned Westerners never again to even think of major oil deals without Putin’s express blessing. They could only play as subordinate partners in the energy game.

With Khodorkovsky eliminated, the Kremlin felt it had achieved full authority over energy. It began to talk itself up as nothing less than an energy superpower, the Saudi Arabia of the north, where Russia’s resources served its geopolitical aims. This was no idle fantasy – the country had the largest natural gas reserves in the world and would overtake Saudi Arabia as the world’s largest oil producer.

Yet the show of disunity – even disloyalty in the government, unnerved Putin. Much of the government was opposed to the turn, leaving it at risk to damaging cracks. Within six months of the Khodorkovsky arrest, the entire Kasyanov cabinet was dismissed in spring 2004. The prime minister had been on holiday with Boris Nemtsov, the opposition leader Khodorkovsky had funded, and is alleged to have discussed the possibility of a move against Putin. When confronted with this rumour Kasyanov later cryptically recalled:

When Putin announced my resignation, he did not say why. But that evening I was told the same story you just mentioned [the plot with Nemtsov] by people close to the president, and I came to believe it. I remembered what happened the day before, February 23rd, when we attended a gala concert at the Kremlin. That night the President behaved strangely. During the intermission, he stood in a corner whispering with [Nikolai] Patrushev [the head of the FSB] and avoiding everybody. The next day, the 24th, Putin suddenly cancelled a cabinet meeting and told me to come alone. 50

The sacking of Kasyanov was the climax of a purge. This had begun in Gazprom and at the bottom ranks. By 2003 as many as 70 per cent of officials inside the Kremlin had been appointed by Putin himself. 51This continued throughout the rest of his first presidential term. By 2008, he had personally appointed 80 per cent of the top 825 positions in the country, most of them military and intelligence roles. 52

The crushing of Khodorkovsky caused this tectonic shift. It would be to blame the victim to suggest that his ambitions upset the balance within the Russian elite, resulting in victory for the forces of reaction – and thus he should never have attempted this. That, however, was the result. A good general picks battles he intends to win. Khodorkovsky’s hubristic sense of power resulted in the sidelining of pro-American free marketers. He misjudged his enemy and misunderstood the battle. It resulted in the elimination of the main alternative source of patronage for the country’s politicians.

Even now Putin still sees him as an enemy. A decade later his views have not changed. In 2010 when asked what would happen to the former CEO of Yukos he snarled: ‘A thief should sit in jail.’ 53At the time of writing Khodorkovsky’s jail term is set to expire in 2014 – but this is far from certain.