Far to the east of Moscow, beyond the Ural Mountains, where birch forest gives way to a taiga of fir trees and swamp, lies the vast flatland of the west Siberian oil basin. Ever since Soviet geologists discovered huge oil and gas reserves there in the sixties, the region had been the power behind the Soviet empire’s global ambitions. It was the key to the country’s imperial might.
The engineers, drillers and geologists who developed the near-deserted territory had been lauded as Soviet heroes. They’d battled the ice and plunging temperatures of winter to build drilling rigs and pipelines across terrain that turned into impassable lakes and mosquito-infested bog during the summer months. Their labours helped turn the Soviet Union, for a time, into an economic powerhouse that by the end of the eighties became the world’s biggest oil and gas producer. Production was recklessly ramped up to meet the ever greater demands of the Politburo. Wells were being flooded with water to force out the oil that helped fuel the Soviet Union’s voracious military-industrial complex. Two thirds of all Soviet oil output was produced there. It was the jewel in the Soviet system that overall held 40 per cent of the world’s gas reserves and 12 per cent of oil reserves outside the Middle East.
Most of the oil and gas extracted was sold domestically at fixed low prices, subsidising the mass production of tanks and other weaponry to arm the Soviet empire against the West.[1] But the oil exports were more strategic: they were the black gold on which the Soviet empire’s global reach was based. The economy of the East German republic was mostly funded through the sale of Soviet oil and gas at a fraction of the world market prices, and the rest of the eastern bloc was propped up by similar deals.[2]
Oil exports in particular were jealously watched over by the KGB. The profits the Soviet state monopoly oil exporter Soyuzneftexport made from the difference between the Soviet and world prices – six times higher – helped fill the hard-currency coffers of the Soviet empire, funding forays into the Middle East and Africa, stoking armed conflicts and uprisings, and financing active measures to disrupt the West.
When the Soviet Union collapsed and the oil ministry’s chain of command shattered, the oil industry broke up initially into four separate vertically-integrated production companies: Lukoil, Yukos, Surgutneftegaz and, for a time, Rosneft. Though they were still nominally controlled by the state, they were mostly taken over by the directors, the oil generals, who had run them in Soviet times, while organised-crime groups, running amok in Russia’s regional towns, tried to muscle their way in.[3] There was a widespread collapse in output, as the oilfields of west Siberia had been largely depleted by decades of Soviet mismanagement. But, unnoticed in the shadows, in the first half of the nineties, members of the KGB’s foreign-intelligence arm kept control over the majority of oil exports. Producers had been ordered to sell up to 80 per cent of their output at the fixed low internal price to the state, which then allowed a system of spetsexportery, specially designated exporters allied closely with the KGB or with crony organised crime, to reap the difference from the global price.[4] Often the funds this brought in were siphoned for black cash for the KGB and the Kremlin – to fund election campaigns and make sure parliamentary votes went the Kremlin’s way – or were simply looted.
When the most strategic and lucrative sectors of Soviet industry were sold off in the mid-nineties under the loans-for-shares auctions, many of these gold seams for KGB networks passed into private hands. The likes of Yukos and Sibneft, a neighbouring west Siberian oil producer, were sold into the hands of the young bankers close to the Yeltsin government, to Khodorkovsky and the partnership of Berezovsky and Abramovich, for just $300 million and $100 million apiece. The access to capital the young tycoons gained through their banks’ management of government treasury accounts helped give them the upper hand in the battle for the country’s resources. The KGB operatives were never going to be able to stump up such amounts.
The consequences were enormous. Oil – despite the low global prices at that time – still made up a large chunk of the country’s export revenues.[5] Khodorkovsky’s men, for instance, set up their own trading networks for Yukos as soon as they took over the company in 1996. The profits were stashed in the private offshore accounts of Khodorkovsky’s Menatep group, far out of the reach of the Russian state, while Menatep found loopholes in the laws to minimise tax payments. The balance of power was decisively shifting towards the Yeltsin-era tycoons. Their privatisation of the oil-export cash flow changed everything. It turned the likes of Khodorkovsky and Berezovsky into full-blown oligarchs, able to bribe Yeltsin’s men, and stack parliamentary votes in their own favour. According to former KGB officer-turned-oil-trader Andrei Pannikov, the break-up of the oil trade into independent ownership was a threat to the integrity of the Russian state that should never have happened: ‘I would never have destroyed the state monopoly. I would have kept all the export trading in state hands.’[6]
For Putin and his KGB men, it was a matter that of course drew their immediate attention. Global oil prices began to surge almost as soon as Putin was anointed Yeltsin’s successor in the summer of 1999. By mid-2002, Khodorkovsky, who’d started out as an intense, softly-spoken chemistry student running discos for the Komsomol, was announcing to the world a personal fortune of $7 billion through his ownership of a 36 per cent stake in the Menatep group.[7] It was a colossal leap in fortune since the days when Menatep acquired Yukos for $300 million in the loans-for-shares auctions of 1995, when Yukos itself was knee-deep in debt.[8] The disclosure officially made Khodorkovsky Russia’s richest man, at a time when the entire Russian state budget was $67 billion, and the market capitalisation of Russia’s biggest state-controlled company, Gazprom, was $25 billion.
Khodorkovsky and his partners in Menatep had been the first Russian tycoons to publicly disclose their business holdings. Most of the oligarchs hid their ownership behind a web of front companies, still fearing retribution from the state after the controversy of the nineties-era privatisations. Khodorkovsky was putting his head over the parapet partly because Putin’s vault to the presidency was meant to signal a legalisation of the country’s chaotic market transition, a securing of the gains of the nineties. It was one of the reasons Putin had won such broad support, most crucially from the Yeltsin Family. Even though he’d ruthlessly taken out the media tycoons, Putin had given no indication that he wanted to increase state ownership anywhere else. And while he’d made plenty of threatening noises about bringing the oligarchs to heel, he’d insisted that he would not overturn the privatisations of the nineties. It seemed that with Khodorkovsky’s disclosure, Russia was further progressing on the way to a more mature and developed market economy. The move was lauded as a breakthrough for transparency, but it was also perhaps Khodorkovsky’s bet on the power of the market to protect him. He was banking on operating according to Western market rules of the game.
But for the siloviki who’d risen to power with Putin, Khodorkovsky’s new status as the country’s richest man – operating outside their control – was another red flag. They’d been waiting in the shadows since the Soviet collapse, harbouring ambitions to restore Russia’s might. Putin’s rise to the presidency, through his subtle deception and promises to the Yeltsin Family, was meant to be the first step towards achieving that. The KGB men had always seen the country’s oil industry as currency in geopolitical power games. In their view, taking control of Russia’s oil resources was going to be crucial in both securing their own position in power and in restoring Russia’s standing against the West. It didn’t hurt, of course, that they would be able to line their own pockets in the process.
The question was how they would go about it. Unlike the Communists, the new generation of siloviki – from the ranks of KGB, which had started the market reforms in the first place – were never going to announce a renationalisation campaign: they’d always declared themselves in favour of the market. But they aimed to use and distort the market as a weapon. They wanted to establish a form of quasi-state capitalism that would further their own – and as they saw it, Russia’s – power.
The gas industry posed a much easier equation than the oil sector. Unlike oil, it had been preserved almost in its entirety as a vast state-controlled monopoly. Gazprom, the state gas giant, was the country’s most strategic asset. Straddling the biggest gas reserves on the planet, it was the world’s number-one gas producer, and brought in the country’s largest tax revenue stream. It not only provided Russia’s homes with heat and light, it also supplied Europe with 25 per cent of its gas needs. Its role as the predominant supplier to much of Central and Eastern Europe, as well as Ukraine and Belarus, meant it could be used as a tool of political influence, while its vast cash pools and financial assets presented a wealth of opportunity for Putin’s men. Under Yeltsin, Gazprom’s senior management had largely taken control of the company, transforming it into their own fiefdom. But Putin made their replacement with his own allies one of his first priorities, launching a sweeping purge after shareholder investigations showed the Yeltsin-era managers had siphoned a string of gas fields and other assets out of Gazprom and into companies connected to them. The men he appointed in their place had all served in executive positions at the St Petersburg sea port, the strategic asset that Putin’s siloviki had taken over, cutting their teeth joining forces with the Tambov organised-crime group. It was the first indication that the alliance forged then would take over assets on a federal scale. Gazprom’s new chief executive was thirty-nine-year-old Alexei Miller, a short, mustachioed man who’d served as Putin’s deputy on the Foreign Relations Committee of the St Petersburg mayor’s office and then as a director at the sea port.[9]
The privately-owned oil industry was going to pose a far more difficult challenge. In St Petersburg, the siloviki had been able to easily bend the city’s law enforcement to their will to push out rivals. But tackling the Moscow oligarchs was a different matter entirely. For all the power they wielded through the FSB, Putin’s followers had not yet consolidated control over the entire system of law enforcement, and the Moscow tycoons were established figures, well known in the West, who’d built companies that were traded on Western markets. At stake was the country’s ability to pull in outside investment, which the pragmatic Putin understood was still essential to speed Russia’s economic recovery from the nineties collapse.
The siloviki began what became known as ‘Operation Energy’ quietly. The Yeltsin Family continued to feel secure in their belief that Putin was a man of the market. To them he was the president-in-training, still learning the ropes of government. In the first year of his rule he was taking intensive lessons in the English language, in how to speed-read stacks of documents, and in the administration and history of the Russian state, according to a senior KGB-linked banker familiar with the matter, who said: ‘The system for preparing leaders had collapsed.’[10]
The Yeltsin Family still believed firmly in Putin’s loyalty, and in his obedience to them. It seems they also believed they had the run of most of the economy for Putin’s first term, while Putin appeared to indicate initially that he didn’t intend to serve beyond that. The Family felt so comfortable, and were so unaware of any ambitions the St Petersburg KGB men might harbour towards the oil industry, that they began to hatch plans to privatise the last remaining state oil major, Rosneft. Roman Abramovich had long been eyeing the company – he and Berezovsky had hoped to merge it into Sibneft when it had first been slated for privatisation in 1997. Now that they believed they’d secured their future, said Pugachev, Voloshin had even prepared a decree for Rosneft’s privatisation that was just awaiting Putin’s signature. Behind the scenes, Abramovich had been quietly lobbying to smooth the way. A row of fine Italian suits and shoes had suddenly appeared hanging in the hallway of Putin’s Novo-Ogarevo residence, courtesy of Abramovich, according to Pugachev. ‘I said, “Volodya, what on earth do you want all this for? You are president of one of the world’s biggest countries. Surely you can get your own suits! You don’t want these bribes. They will ask for something in return.”’[11]
For Pugachev, Abramovich’s overtures had been the final straw. Pugachev believed it was essential to keep the state’s last oil company out of the Family’s hands. As his standing rose due to his role in propelling Putin to power, he had begun to move fluidly between alliances with Putin’s St Petersburg KGB men and with the Yeltsin Family, depending on the political imperative, often keeping his real allegiances hidden. But on this occasion he began to shift decisively towards the siloviki. ‘They’d invited the president to Voloshin’s dacha. They called him to them. It was absolutely improper,’ he recalled. ‘I said, “Why are you going there? Why should it be privatised, what are you thinking about? There is no money in the budget. Without Rosneft, how do you intend to live, where are you going to get wages from?”’[12]
In the background, the St Petersburg siloviki were already building their own defences to keep Rosneft out of private hands. Behind the backs of the Yeltsin Family they’d been quietly putting a parallel system of government in place, according to a senior banker close to the security services.[13] Leading the process was Igor Sechin, Putin’s loyal KGB colleague from St Petersburg, who’d been appointed deputy head of his administration, and, further behind the scenes, according to the senior banker, Gennady Timchenko, the alleged former KGB operative and close Putin ally from the St Petersburg oil terminal. In those days, the banker said, Timchenko was one of the most influential operators in Putin’s entourage: ‘He was immediately powerful as soon as Putin was appointed president.’ But Putin kept him hidden from view. ‘He was like the invisible man. He was never seen,’ another person close to Putin said.[14] (Timchenko, through his lawyers, said any suggestion he was involved in any project to create a parallel system of government was ‘utterly false to the point of being absurd’. Timchenko has ‘simply never involved himself in political issues, nor discussed political issues with Mr Putin or any of his staff or ministers.’)
One of the first tasks of this group was to make sure Putin was elected for a second term, regardless of whether he himself was yet convinced that that was what he wanted. To achieve this, they needed to bolster their position in power. ‘Their task was to get their hands on more cash flow,’ the banker said. ‘They were concerned that the Family, Abramovich, were controlling certain sectors of the economy.’[15]
Meanwhile, in the background, a broader caste of KGB men had long been drawing up lists of targets in the oil sector.[16] Initially at the top of the list was Surgutneftegaz, the west Siberian oil producer run by Vladimir Bogdanov, who’d served as its director since Soviet times. But Bogdanov and Surgutneftegaz had already established a close relationship with Putin’s KGB men through Timchenko, whose oil trader had a near monopoly on exports from Surgut’s Kirishi refinery. ‘Timchenko brought Bogdanov to the Kremlin to meet Putin for tea,’ the senior banker tied to the security services said. ‘There Bogdanov told Putin, “It’s your company. I am for you in any case. Just tell me how to spend the money.”’
The siloviki had then trained their sights on Lukoil – at the time Russia’s biggest oil major, forged out of three west Siberian oil units by the former Soviet deputy minister of oil and gas, Vagit Alekperov, when the Soviet Union collapsed. Alekperov was a wily Azerbaijani who’d been one of the founding fathers of the carve-up of the Russian oil industry. He’d always been close to Russian intelligence networks – Lukoil had initially sold oil through Urals Trading, the oil trader set up by former KGB officer and Timchenko partner Andrei Pannikov – and it didn’t take long before Putin’s men had brought Lukoil to heel.
The opening volley against Lukoil was fired in the summer of 2000, amid the first wave of Kremlin probes into the oligarchs. The tax police declared that they’d opened a criminal investigation into alleged tax fraud by Alekperov, which they said was part of an industry-wide probe that was later claimed to have unearthed a total of $9 billion in tax avoidance through special offshore zones created inside Russia.[17] But it wasn’t until September 2002 that the pressure on Lukoil really began to mount. Early one morning that month, Lukoil’s first vice president Sergei Kukura was kidnapped by men dressed in police uniforms and wearing masks, who had apparently incapacitated him and his driver by injecting them with heroin, then thrown bags over their heads.[18] Kukura reappeared only thirteen days later, apparently at a loss about who was behind the attack. Four months later, Russian police mysteriously shelved their investigation into the kidnapping.[19] A week before, the government had announced that Lukoil had agreed to pay $103 million in back taxes – exactly the amount the government claimed it had lost through Lukoil’s operations via the internal offshore zones.[20]
If Alekperov and Lukoil had reached some kind of compromise with Putin’s new government, then, as with Surgut, there was no need for any formal takeover by the state. Later, a senior oil executive told me that Alekperov had agreed to hold some of his stake on Putin’s behalf, part of a system of fronting for the Kremlin that was to become entrenched in Russia’s most strategic industries.[21] (Lukoil denies any such system is in place.)
But while Lukoil appeared to quickly bend to the will of the new masters, a big chunk of oil output was still far out of the Kremlin’s reach. Intent on rectifying that, the siloviki were heading towards a standoff that would become the defining moment of Putin’s rule, changing the face of the Russian oil industry and shifting the country definitively towards a form of crony state capitalism in which strategic cash flows were diverted into close allies’ hands. The power of Putin’s KGB men would be cemented, helping forge their return as a force on the global stage. It was a conflict that would also take down Russia’s richest businessman and subvert the entire Russian legal system.
Of all the Moscow oligarchs, Mikhail Khodorkovsky was the one most actively seeking to integrate his company into the West, most openly courting Western investors and leaders for support. He was leading the way in trying to instil Western corporate governance methods and transparency at his company, after years of being a bad boy of Russia’s Darwinian business scene. The conflict that unfolded as Putin’s siloviki fought to wrest away Khodorkovsky’s control of Yukos’s west Siberian oilfields was at once a clash of visions for Russia’s future, and a battle for empire. It was to define Russia’s imperial resurgence and Putin’s efforts to restore his country as an independent force against the West. But it was also a clash that was deeply personal. It had its roots in a conflict at the end of the nineties, when Khodorkovsky had taken away one of the last remaining black-cash channels from Putin’s closest allies, who’d formerly been at the heart of KGB operations to transfer Communist Party funds into the West.
Khodorkovsky’s takeover of VNK, or Eastern Oil Company, was one of the last big oil-industry privatisations of the nineties – and seeing it seized from under their noses had been the final straw for Putin’s men. ‘It was the first conflict between Putin’s group and Yukos, and the most serious one,’ said Vladimir Milov, a former deputy Russian energy minister. ‘This is when it all began.’[22]
*
Far away from it all now, as we sit in the oak-panelled conference room of his London office overlooking the leaves of Hanover Square, after a ten-year jail sentence and in forced exile from home, Mikhail Khodorkovsky claims he wasn’t aware back then of the ties between VNK and Putin’s KGB men. ‘Had I known how much VNK was a structure in which the FSB had interests, I probably wouldn’t have risked going in there,’ he said,[23] dressed now in a simple quilted shirt not unlike the padded jackets he’d been forced to wear in Siberian prison, as if it was a habit he couldn’t break.
It was the end of the nineties when Khodorkovsky had made it to the top of Russia’s hurly-burly transition to the market – and VNK was one of the Russian oil industry’s last prizes. When it was put up for privatisation in 1997, the sale was heralded as a clean break from the controversial discount loans-for-shares deals. The company, forged out of the Tomskneft oilfields surrounding the genteel central Siberian university town of Tomsk and the Achinsk oil refinery, was slated to go on sale for as much as $1 billion, nearly ten times more than the loans-for-shares sales of Yukos and Sibneft had raised just one year before.[24] Anatoly Chubais, the steely privatisation tsar, was determined to show the world that Russia was transforming itself into a real rules-based market economy. He wanted VNK to be sold for its true market value.[25]
The only problem was that the men who ran the company appeared to think that Chubais had promised it to them. VNK was meant to be the consolation prize for the KGB men behind it, after they’d watched much of the rest of the Russian oil industry swallowed up by the independent tycoons. It had served as a source of cash, an obschak, for them ever since it was formed in 1994. Much of its oil exports had been directed through companies connected to a little-known Austrian company called IMAG, which was run by Andrei Akimov, a senior foreign-intelligence officer who’d headed the USSR’s foreign banking arm in Austria, Donau Bank, right up to the Soviet collapse.[26] Akimov had been the youngest ever Soviet bank chief when he headed Donau Bank at the age of thirty-four, having been appointed just as the KGB began setting up schemes to siphon the Communist Party wealth through foreign bank accounts, while Vienna had long been a strategic gateway for Soviet funds into the West.[27]
Akimov’s connections in Russia’s foreign-intelligence networks ran far and deep.[28] Working as his deputy at IMAG was an economist who’d helped develop the early perestroika reforms under Primakov at the Institute for World Economy, the hive for foreign-intelligence operatives. This was Alexander Medvedev, and he was to become Akimov’s closest confidant,[29] while IMAG was to become one of the earliest sources of financing for Timchenko’s trading operations.
Akimov had been so convinced of victory in the VNK sell-off that he’d had Medvedev appointed as VNK’s vice president in charge of finance ahead of the sale.[30] For IMAG, hundreds of millions of dollars in oil contracts were at stake. Almost ever since its creation, VNK had sold most of its oil through a trader called East Petroleum Ltd, registered near IMAG’s offices and run by another close Akimov associate, Yevgeny Rybin.
When the state’s 84 per cent stake in VNK was put up for auction and Khodorkovsky decided to bid for it, he was heading into a hornets’ nest. With the help of an American banker named Charlie Ryan, who’d been associated with Putin since he’d done a stint at the European Bank of Reconstruction and Development in St Petersburg in the early nineties, Akimov was determined to win, no matter what the cost. The two men were aware from the start that Khodorkovsky was bidding against them. ‘We decided we were going to buy VNK,’ said Ryan. ‘Sasha [Medvedev], Andrei and I were going to organise the bid with proper funds.’[31]
But the sale turned into a bruising standoff between Khodorkovsky and Akimov’s men, and the outcome was almost as murky as the loans for shares. The state’s 84 per cent stake in VNK was to be sold in two parts – one 50 per cent minus one share stake through a cash auction, and the rest through an investment tender. But the first part of the sale was held behind closed doors, without being open to any scrutiny, while the second ended up being cancelled because there was only one bidder, a shell company representing Khodorkovsky’s Yukos.[32]
Instead of setting a new standard for transparency, the sale ended up looking just as rigged as the privatisations that had gone before. The government announced that Khodorkovsky’s Yukos had won the cash auction with a bid of $775 million for a 45 per cent stake. It had already bought a further 9 per cent on the open market, making its stake a controlling one.[33] Yukos had agreed to pay far more than anyone had offered in any of the privatisations that had gone before, but according to Ryan, Khodorkovsky had still skewed the outcome in his favour, leaving Akimov’s team without a chance. Ryan said that Khodorkovsky’s men threatened Akimov and his team, and then, between the first and second auctions, paid off a section of the Russian security services to raid the Federal Property Fund, which was organising the sale.[34] During the raid they’d seized documents relating to Akimov’s bid, and then rigged the outcome, Ryan claimed. ‘They saw our information and they knew we’d bid more. They then tried to borrow more money, guaranteed by their own oil exports, including from the exports of VNK, before they’d even acquired control over the company.’ Khodorkovsky and his team were able to raise more money than Akimov’s, and emerged with the winning bid. They never had any intention of taking part in the second auction.
Khodorkovsky denied he was involved in any such actions. But what followed was a protracted battle over VNK’s exports, which Akimov’s team had pledged to sell through Yevgeny Rybin’s East Petroleum for the next twenty years, as a further defence against the company’s cash flow falling into outside hands.[35] Khodorkovsky refused to continue this contract, and the standoff escalated beyond the boardroom, into the courtroom and then onto the street. Two attempts were made on Rybin’s life. The first came late on a snowy evening in November 1998, when a gunman fired at him on a Moscow street. The second came in March the following year, when a bomb exploded and killed Rybin’s driver. Shaken to the core, Rybin fled Russia and went into hiding for the next five years.
Akimov and his men were bruised and deeply humiliated by Khodorkovsky’s takeover of VNK. The story of the battle for the company was little-noticed during the chaos that followed the August 1998 financial crisis, but it was to define the future battle for Russia’s oil sector. From then on, Akimov was set on revenge. And though he was in hiding in Vienna, Rybin began gathering compromising information on Khodorkovsky’s Menatep group and feeding it to Russian law enforcement, most of all to friendly officers in the FSB.[36]
At first Rybin’s efforts didn’t seem to be getting anywhere. But after Putin came to power, the atmosphere changed. Sechin and one of Akimov’s partners began a campaign to convince the president that Khodorkovsky posed a danger to his hold on power, according to a senior banker with knowledge of the matter. Rybin had also enrolled Egor Ligachev, a prominent member of the old guard of the Politburo, who served as a lawmaker in the Tomsk region of Siberia where VNK’s oilfields were located.[37] Ligachev delivered Putin a stark message: Khodorkovsky was endangering the existence of his regime; his men had all the country’s financial flows under their control, and soon they would have more money than the state itself – already he’d bought more than half the state officials in power.[38]
It was a message that resonated strongly with Putin as he sought to shore up his power against rival groups. But despite the manoeuvrings, he was at first reluctant to follow the calls to take Yukos on. The company was too big, and too well-entrenched in Western markets – it seemed too complicated a task, said a senior banker close to the security services.[39] It was the country’s most recognisable, most widely traded company. It had become a symbol of Russia’s market progress.
The takedown might never have happened had it not been for Khodorkovsky’s own behaviour. Instead of bowing to the Kremlin’s will, as Lukoil and Surgutneftegaz had before, Khodorkovsky kept raising the stakes until it did become a battle over who would rule Russia and the direction the country would take. He was willing to bet his life on Putin’s men not daring to arrest him: he believed they weren’t strong enough, and would not risk Russia’s precarious transition to the market. In many ways, this was typical of him. ‘He set about building his empire like a maniac,’ recalled his adviser Christian Michel. ‘He was stoppable only by a bullet.’[40]
*
Khodorkovsky himself admits now that he is an adrenalinschik, an adrenalin junkie, with a vastly reduced perception of risk. He’d first become aware of this many years before the battle for Yukos, when he was a chemistry student at the Mendeleyev Institute in Moscow, specialising in explosive materials. ‘I am a person who for some reason unknown to me does not have the feeling of fear,’ he told me with a wry grin in an underground bar in Zürich not long after his release from ten years in jail. ‘I never had a feeling of danger from making a bomb, or from holding one. My favourite pastime was always rock-climbing without any safety equipment. This is not because I somehow overcame my fear, it’s because I didn’t have it. All those years in prison I slept absolutely soundly. Even though there were situations when I’d been attacked with a knife, I would go back to the bunk where I’d been lying and would peacefully go asleep. It was funny even for me to understand sometimes, when people asked me whether I knew that behind my back there could be a knife. I just wasn’t afraid.’[41]
The first time Khodorkovsky heard that he could be in danger was towards the middle of 2002. Lukoil was already under fire, and the former KGB men he employed in his own security service warned him that the FSB had launched an operation, Operation Energy, to collect compromising information on the country’s energy giants. In Yukos’s case, they said, the target was the company’s operations with the shares of VNK. But Khodorkovsky assumed it was no more than a run-of-the-mill operation to seek information that could bring the oil barons to heel. ‘This was not the first such operation, and we didn’t think it was so radical,’ he said when we met in the safety of his office in Hanover Square.[42]
Back in 2002, Khodorkovsky was unveiling his $7.6 billion fortune through his ownership of a 36 per cent stake in Menatep. He’d become, relatively speaking, a beacon of transparency among the Byzantine rules that still governed most of Russia’s business climate then. He was staking his company and his future on Russia’s integration with the West. It was only three years since he had represented the epitome of Russia’s wild east robber capitalism, accused of violating the rights of Western minority shareholders. But now he was seeking legitimisation and protection for the future in Western markets, and in blazing a trail for better, Western-style, corporate governance standards at Yukos.
He was still as intense and driven as when he started out in business in the Komsomol. But he’d swapped his heavy thick-lensed glasses of the mid-nineties for light designer glasses that seemed in their clarity to represent his new drive for transparency. Although he still dressed simply in jeans and dark poloneck sweaters, the abundant black hair he had sported in the nineties was now cropped short and had turned a steely grey, while his moustache was long gone. He’d hired a string of Western executives to oversee finance and production at Yukos, leading an industry-wide turnaround that finally helped restore output at west Siberian oilfields to its levels before the Soviet collapse. Across the board, the privately-owned oil majors were hiring Western drilling-equipment makers, improving their techniques, investing in equipment and hiring Western accountants. Yukos was by then producing more oil than Kuwait.
As Khodorkovsky won plaudits in the West for his transformation, while Yukos’s stock price continued to soar, he deepened his engagement with the West further still. He wined and dined the Washington elite and launched a philanthropic organisation, Open Russia, where Henry Kissinger and a former US ambassador to Russia sat on the board. He sent a pioneering tanker of crude to Texas, the first shipment of Russian oil ever sent directly to American shores, and began lobbying for a pipeline to be built, independent of the Russian state, from Russia’s far north Murmansk port to the US.
All these activities only antagonised Putin’s KGB men still further. Khodorkovsky’s dalliance with the West was a direct challenge to their authority, while his lobbying of the other private oil barons to band together and build privately-owned oil pipelines was an even greater threat.[43] The oil-pipeline system had always been the preserve of the Russian state, and granting access to it was seen as one of the few strategic levers the government still had to keep the oil barons in check. By early 2003, as Putin’s security men began to step up their plans for revenge, Khodorkovsky was admitting privately that he might have a problem. One gloomy morning that February we were sitting in the dim lamplight of his cavernous office in the fortress-like concrete hulk on one of Moscow’s main thoroughfares that served as Menatep’s headquarters. He spoke ever more quietly as he said it was becoming clear that there was ‘a group of people in the Kremlin who want to take my company’. These men wanted to test once again whether state-owned companies could be more effective than private ones, he said. But he insisted – he was sure, in fact – that Putin would never let that happen, that he’d meant it when he’d pledged not to overturn the privatisations of the nineties. ‘Putin keeps his word,’ he said. ‘I am absolutely not worried.’[44]
The mood that dark grey February morning belied the tension and the background preparations for the battle ahead. Khodorkovsky clearly still hoped that Putin, despite his background in the KGB, had another side to his personality, one that had been nurtured by his work in St Petersburg with the liberal and democratic Sobchak. And, just a few weeks later, it was as if Khodorkovsky was preparing to battle for Putin’s better angels when he decided to make a direct appeal to him. He’d already warned the month before that Russia stood at a crossroads, that the country could either go down the road of state bureaucracy, like Saudi Arabia where half the budget was spent on the wages of state bureaucrats, or it could take the path of Western economies, of increasing productivity and post-industrial societies with rising service sectors.[45] When Russia’s oligarchs gathered later that February for their by-now regular meetings with Putin around the vast oval table of the Kremlin’s Ekaterinsky Hall, Khodorkovsky decided to frame the question of the gradually increasing state participation in the economy more starkly still.
He had decided to make a point about state corruption, and began with a PowerPoint presentation boldly titled ‘Corruption in Russia: A Brake on Economic Growth’. He said that the level of corruption in the country had reached 10 per cent of GDP, or $30 billion a year, at the same time as the annual tax take was estimated at about 30 per cent of GDP.[46] Why was it, he asked, that students were racing to qualify as officials in the Russian tax service, where the official wage was only $150–170 a month, while far fewer wanted to become oil engineers, whose wages were four times higher.[47] ‘This could lead one to certain thoughts,’ he said, with a glance at the president sitting across the huge table. Then he raised the issue more pointedly still, turning his attention to a deal in which the state-owned oil giant Rosneft had made its first big acquisition of recent years, paying $600 million to acquire an oil company, Severnaya Neft, which sat on huge reserves in Russia’s far north. The privately-owned oil companies had been eyeing it for months, but Rosneft had trumped them, paying twice the accepted valuation. The question was, Khodorkovsky suggested, where did the $300 million in overpayment go? An investigation should be mounted, he told the president, to pin down the reason for the overpayment.[48] Whispers had been circulating for weeks that the difference was a kickback pocketed by officials.
Khodorkovsky’s gamble backfired badly. He’d hit one of Putin’s rawest nerves. The discussion was being broadcast live on TV, and though Putin was smiling, he was clearly smarting. ‘Rosneft is a state company that should increase its reserves,’ Putin said. ‘Some other companies, for example Yukos, have an excess of reserves, and how it acquired them is to be one of the subjects we will discuss today, including questions of non-payment of taxes … I return the puck back to you!’[49]
‘When I saw this on TV I realised this was the end for us,’ said Khodorkovsky’s chief of analysis, former KGB general Alexei Kondaurov. ‘We hadn’t discussed it before. When he came out after the meeting, I said, “Mikhail Borisovich, why couldn’t you give the corruption presentation to someone else?” He said, “How could I give this to someone else? There are so few fighters among us.” And so we began to have problems. I knew he [Putin] would never forgive him for this. Putin’s men had taken $300 million for themselves.’[50]
If Putin’s KGB men had pocketed a $300 million kickback, it was the first major deal since he took the presidency in which they’d been able to enrich themselves. The deal had been structured through one of the initial owners of Severnaya Neft, Andrei Vavilov, a former deputy finance minister, who conceded he did not own all of it. (On paper, Severnaya Neft was owned by six obscure companies.) According to one person familiar with the deal, Vavilov had kicked the money back to Putin through Rosneft’s president, Sergei Bogdanchikov.[51] When we spoke, Vavilov denied that any kickbacks were involved,[52] and the Kremlin hotly denied any irregularity too.
But judging by Putin’s reaction, Khodorkovsky had hit a sensitive spot. For Putin, it was unthinkable for Khodorkovsky to openly challenge him over the deal. He deeply resented the allegation of corruption when, to his mind, Khodorkovsky had acquired his fortune, in particular Yukos, in a corrupt way.
Khodorkovsky had opened the door even wider for the Kremlin to attack his wealth. But he had laid down the gauntlet, in part, because he had no choice. The Severnaya Neft deal, which boosted Rosneft’s reach, signalled that the rules of the game were significantly shifting in favour of the state, challenging Khodorkovsky’s entire business model. ‘He understood that to act in any other way was not possible,’ said Kondaurov. ‘He could not develop his business any other way. So he went for broke. He bet it all. He understood that in any case further ahead there could only be a dead end.’[53]
From that moment on, it was as if Khodorkovsky was putting all his chips on the table, and he accelerated the expansion of his empire, driving through a $36 billion deal that would merge Yukos with Abramovich’s Sibneft, creating the world’s fourth-biggest oil producer, and the second-biggest in terms of reserves.[54] The deal was announced without warning at the end of April, in a flurry of camera lights in the elegant lobby of Moscow’s newest high-end hotel, the Hyatt, just around the corner from the Lubyanka headquarters of the FSB. It was as if Khodorkovsky believed the merger would provide him with an extra layer of protection, as he was joining his company with the Yeltsin Family. But to this day, his business partner Leonid Nevzlin believes Abramovich was setting a trap, seeking to take over Yukos through the merger and squeeze Khodorkovsky out.
Khodorkovsky continued regardless. He stepped up his drive for integration with the West, launching historic behind-the-scenes talks on the sale of a stake in the merged YukosSibneft to a US oil company, either ExxonMobil or Chevron.[55] This would be yet another layer of protection for Yukos, keeping it beyond the reach of the Russian state. Only three months before, another group of oligarchs led by Alfa Group’s Mikhail Fridman, also a former Komsomol member, had agreed a groundbreaking $6.75 billion partnership with British Petroleum, under which the UK company would take a 50 per cent stake in their Tyumen Oil Company, known as TNK. It seemed only natural that YukosSibneft would follow. At first Putin seemed to humour the negotiations, harbouring grandiose ambitions, one person familiar with the matter said, that with the help of loans from Russian state banks, YukosSibneft would instead take control of one of the US energy giants.[56]
But while Fridman and his business partner Pyotr Aven, who’d once worked closely with Putin on the St Petersburg oil-for-food deals, kept a low profile and did everything they could to display loyalty to the Putin regime, Khodorkovsky began to step up his activities in the political field too. He’d been pouring funds through his Open Russia foundation into philanthropy, seeking to teach young Russian teenagers the principles of democracy at annual youth camps and at a school he’d established outside Moscow for the children of Russian servicemen killed in action. Shortly before the merger between Yukos and Sibneft was announced, he’d made his personal political ambitions clear, telling the world he wanted to step down from the helm of Yukos when he reached his forty-fifth birthday.[57] That would be in 2007, just before the presidential elections scheduled for 2008. It seemed he was signalling his intention to run.
Khodorkovsky had also long been in talks with parliamentary leaders about transforming Russia into a parliamentary republic, a move that would erase what many critics saw as the fatal flaw of the country’s political system – the overconcentration of power in the hands of the president. The system, which allowed the president to essentially run the country by decree, had been tipped in favour of the president following Yeltsin’s violent standoff with parliament in 1993. A move to a parliamentary republic would strip key executive powers from the president and transfer authority to the prime minister, elected by parliament. Khodorkovsky insists now that these talks went on within Putin’s full view, and with his consent.[58] He says they were not aimed at reducing Putin’s power, but at forging a more balanced system after he stepped down in 2008 after two terms in office, which in those days was seen as the constitutional limit. But many viewed Khodorkovsky as driven by a growing megalomania, and eyeing the role of prime minister for himself.
Like many of Russia’s business tycoons, Khodorkovsky was funding political parties in the Duma. This was actively encouraged by Alexander Voloshin, the Kremlin chief of staff, and his deputy Vladislav Surkov,[59] in the hope that it would help to turn the Communists into more of a party of the left-wing bourgeoisie. But concerns were growing that Khodorkovsky was taking the practice too far. He was pouring tens of millions of dollars into funding the Communists and two liberal parties, Yabloko and the Union of Right Forces. Two of the top executives from his Yukos group headed the Communist Party candidates list, while one of his closest business associates, Vladimir Dubov, a founding partner of the Menatep group, had already won election in December 1999, and headed the powerful parliamentary committee on taxation.[60]
The clout Khodorkovsky wielded in parliament was beginning to pose a challenge to the Kremlin’s power. The situation was all too strongly underlined in May 2003, when the tycoon managed to secure enough parliamentary votes to block Kremlin efforts for sweeping oil-sector tax reforms that for the first time aimed to restructure the Russian economy away from its over-reliance on oil income.[61] Fast-rising global oil prices – from $12 per barrel in 1998 to $28 in 2003 – had helped to rapidly boost government coffers and pay down foreign debt. But the increasing oil price was also further heightening Russia’s dependence on oil and gas revenues to fill its budget and for economic growth. In 2003, oil and gas output accounted for 20 per cent of Russia’s GDP, 55 per cent of its entire export earnings and 40 per cent of total tax revenues.[62] The International Monetary Fund had produced a report which showed that Russia had become five times more dependent on world oil prices by 2003 than it was before the August 1998 default – when the precariousness of the country’s reliance on the global oil price had become all too disastrously evident.[63] If oil prices dropped back down to the $12 per barrel level last seen in 1998, Russia could lose $13 billion, the equivalent of 3 per cent of its GDP, in budget revenues, the IMF said.
Russia’s overarching dependence on global energy prices outside its control had long had the more liberal wing of Putin’s government searching for ways out. In the Yeltsin years, the government was too busy lurching from crisis to crisis to reduce Russia’s reliance on oil and gas revenue – it needed every source of income it could get as it scrambled to collect taxes. But now that oil prices were surging, the liberal faction in government – led by Alexei Kudrin, the finance minister who’d served under Sobchak with Putin in St Petersburg, and German Gref, the economy minister, who’d also worked in St Petersburg as the Federal Property chief – could finally seek to use the more stable situation, and the burgeoning revenue, to restructure the economy. As early as February 2003, Gref had announced measures to further increase the tax take from the oil industry’s windfall gains, in order to then plough state investment into high-tech and defence sectors.[64]
The government was seeking to raise taxation on the oil industry both through levying greater export taxes and a royalty tax. But Khodorkovsky was resisting the royalty taxes all the way. When, in May, his men in parliament were able to defeat one of the first government attempts to impose it, the liberals in Putin’s government – Gref and Kudrin – took it personally. Till then, according to one senior banker close to Kudrin, they’d been seeking to defend Khodorkovsky from the growing appetite of the statist security men to attack him. But he’d not only undermined their plans, he’d also undermined their arguments in his defence. ‘He’d become a major investor in the Duma,’ the banker said. ‘He was bankrolling half the Duma. It had become clear that to say he wasn’t a threat was utter rubbish. The deal he put together to pull the vote on the increase in the tax burden was backed not just by a coalition of pro-business deputies, but by diehard Communists, rabid anti-Semite nationalists, liberals and conservatives. It was the most bizarre mix of people voting against a tax increase. Kudrin called him and said, “Misha, you’re fucking up. You’re not supposed to buy the organs of the state. There are people out there who want to increase taxes to 90 per cent. You should have taken the deal.” But you know what he told Kudrin? He said, “Who do you think you are? Go fuck yourself. I will have you removed.”’
The situation, Gref and Kudrin believed, was becoming untenable. Khodorkovsky, the banker claimed, made things even worse when, jubilant after the vote, he began calling future candidates for the post of prime minister and telling them they would have to agree their agenda with him. ‘He was telling them the vote was an objective demonstration of his control of the Duma. He said he now had the right to pick the next PM.’[65]
Khodorkovsky denies ever making any such calls. But a few weeks later a report was published in the media claiming that he was the leader of a ‘dangerous’ group of pro-Western oligarchs who were seeking to undermine presidential rule. Their aim, the report said, was to purchase majority power in parliament and transform the country into a parliamentary republic where the president would play no more than an honorary role. The report, which described Khodorkovsky’s recent actions almost exactly, was clearly intended to further justify the paranoia among Putin’s men. It called the actions of the group of oligarchs ‘anti-national’. Their property was registered in offshore zones in order to protect it against the Russian state: ‘It’s possible to say the oligarchs … appeal to the resources of other states as a guarantee of their political and economic interests in Russia. Having achieved the privatisation of the main assets of the national economy, they are now moving on to privatise political power in Russia.’[66]
The report exactly reflected the mindset of Putin’s men, and, according to its author and a senior banker close to the security services, it also reflected what they’d heard when they’d tapped the phones and offices of Khodorkovsky and his associates. ‘Many of those who are in jail today are there because the security men heard exactly what they thought of them. They’d heard the insults in their name,’ said Stanislav Belkovsky, a well-known political analyst who co-authored the report.[67]
Soon Putin also began to make his feelings clear. Later that May he called Khodorkovsky, Abramovich and several of their key lieutenants to a private dinner in the oak-panelled reception room of his Novo-Ogarevo residence. According to one of those present, over the meal they’d discussed the Exxon/Chevron deal, but when they moved on to the fine cognac, Putin ordered Khodorkovsky to stop funding the Communists. He objected, saying he’d agreed the funding with Voloshin and Surkov, the chief and deputy chief of staff, but Putin told him, ‘Leave it. You have a big company, you have a lot of business to complete. You don’t have time for this.’ Khodorkovsky continued to dig in his heels, saying he couldn’t prevent the other Yukos shareholders from funding whomever they wanted, even if he himself stopped funding the Communist Party. ‘He said, “If we are an open and transparent company then I can’t stop shareholders and employees from following a certain political line.” He tried to explain to Putin that social projects and the support of democracy in Russia were just as important to him as the business.’[68]
The conversation ended abruptly, and the guests left. But Putin wasn’t going to leave the matter at that. As he prepared to leave Russia later that June for the honour, pomp and ceremony of a state visit to the UK, his first as president, where he was to be fêted by prime minister Tony Blair and the Queen, he gave the first hint of trouble ahead. In an annual press conference, he lashed out at the business barons for blocking reforms in parliament to raise the tax take on the energy industry. Although he didn’t mention Khodorkovsky by name, his reference was unmistakable. ‘We must not allow certain business interests to influence the political life of the country in their group interests,’ he said.[69] For the first time, Putin had also spoken out publicly against reform of the political system to transform the country into a parliamentary republic. It was out of the question, he said, even ‘dangerous’.
It was clear to everybody who Putin’s statements were aimed at. And while he was out of the country, attending a glittering banquet in Buckingham Palace and signing off on the accord between BP and TNK, which Blair hailed as a sign of the UK’s ‘long-term confidence in Russia’, the machinery of state rolled into action. Orchestrated to look as if it had nothing to do with Putin, Russian prosecutors were quietly taking the first, fateful step in the attack on Yukos. They arrested the company’s security chief, Alexei Pichugin, and then, on his boss Khodorkovsky’s fortieth birthday, charged him with the murder of a married couple who they claimed had tried to blackmail him over his orders to assassinate another Menatep employee.[70] The threat from the Kremlin couldn’t have been stronger. But Pichugin’s arrest might have passed unnoticed had it not been for a much more high-profile arrest that followed a week later. Platon Lebedev, Khodorkovsky’s wisecracking, long-standing right-hand man, the chairman of the Menatep group and the man behind much of its business, had been arrested. Suddenly Khodorkovsky’s world was on fire.
Lebedev had been hauled from his hospital bed in handcuffs, charged with embezzling a 20 per cent stake in Apatit, the fertiliser giant that was the first big enterprise privatised by Menatep.[71] News of the arrest was splashed over newspapers everywhere, and $2 billion was wiped from Yukos’s market capitalisation in the space of a day.[72] In the background another criminal case, related to the privatisation of VNK, was opened, another senior Yukos executive was sought for questioning. The onslaught against Yukos had begun.
That summer the headlines continued relentlessly. Yukos’s stock was pummelled as prosecutors stepped up their investigations. At the end of July, four days after Khodorkovsky had returned from a trip to the US to drum up investor support, prosecutors announced four more separate criminal inquiries into murder and attempted murder by Pichugin.[73] The announcements dredged up all Khodorkovsky’s worst nightmares. Under examination were not only the attacks on Yevgeny Rybin over the VNK shares, but also the killing in June 1998 of the mayor of Nefteyugansk, the west Siberian oil town where Yukos was headquartered. The mayor, with whom Khodorkovsky had been locked in conflict after Menatep took over Yukos, had been shot dead on his way to work on the morning of Khodorkovsky’s birthday, and rumours had fast spread that he’d been killed by a zealous underling wanting to present Khodorkovsky with a birthday gift.[74] Yukos had been preparing to spin off the service companies that employed nearly 30,000 workers from Nefteyugansk at its main production unit as it sought to streamline its cash flows, and the mayor had personally protested in a letter to Yeltsin about the city’s plummeting tax take after the Yukos takeover. Thousands of the town’s citizens took to the streets to openly accuse Khodorkovsky of ordering his death. But Khodorkovsky, according to a Financial Times journalist who spoke to him not long after, appeared genuinely disturbed by the killing.[75]
Khodorkovsky vehemently denied any involvement by him or any of his associates in the murders and attempted murders. In the case of the mayor of Nefteyugansk, his lawyers pointed to dangerous Chechen criminal groups which had had a grip on some of Yukos’s exports until Khodorkovsky’s men forced them out.[76] And later, when the backgrounds of the KGB men Khodorkovsky had fought over VNK became clear, one person close to him suggested that the killings had in fact been organised by VNK’s KGB backers, in an attempt to tarnish Khodorkovsky’s name.[77]
Khodorkovsky sought refuge and protection from the United States. Immediately after the arrest of his key lieutenant Lebedev, he’d headed directly for the US embassy, where, among the bunting and the stars and stripes on display for Independence Day, he’d insisted to reporters that he didn’t think the conflict between himself and the government could last.[78] Soon after, he attended a conference in Sun Valley, Idaho, where he hobnobbed visibly with the likes of Bill Gates and Warren Buffet.[79] On his return to Moscow he again sought to raise the stakes, declaring on national TV that any continuation of the attack on his organisation would lead to an upsurge in capital flight from Russia that would ruin the investment climate and turn the clock back to the totalitarian past.[80]
But Khodorkovsky’s overtures to the US had only antagonised the Kremlin further. In September, as Putin prepared for a major visit to the US where he was to hold talks at Camp David with President George W. Bush, he had a stark message for anyone who thought he could hold the prosecutors back. These cases involved murders, he pointedly told US journalists. ‘In such a case, how can I get involved in the prosecutors’ work?’ he asked.[81]
If Khodorkovsky had ever had any chance of escaping the full force of the Kremlin campaign, the final straw for Putin came during his visit to America. He had been invited to the New York Stock Exchange, where he addressed dozens of leading US executives and assured them of Russia’s commitment to a market economy in which no privatisations would be overturned. On the sidelines, he’d met privately with the chief executive of ExxonMobil, Lee Raymond, the towering Midwesterner who’d led Exxon through its merger with Mobil to become the world’s biggest company, worth $375 billion. Known for his aggressive style, Raymond had not minced his words with Putin, telling him he wanted to eventually buy control of YukosSibneft, after the first stage of a deal in which Exxon would buy a minority stake.[82]
Putin was totally taken aback. He’d never discussed any scenario in which a US energy giant could take control of Russian reserves with Khodorkovsky or with Abramovich. He’d been under the impression that the idea was for Exxon or Chevron to take a minority stake, while YukosSibneft took a stake in one of the US energy giants too. ‘For Putin, the exchange of shares was important,’ said one person familiar with the negotiations. ‘It would have been an energy bridge between Russia and the US.’[83] But as the pressure on Yukos had grown that summer, shareholders had pushed to hurry a sale. They wanted to cash out completely, rather than swap shares.
For Putin, the sale of a controlling stake in YukosSibneft to ExxonMobil was absolutely out of the question. He couldn’t possibly approve the sale of control of Russia’s strategic reserves to the US. It went against everything the KGB men stood for in their bid to restore Russia’s imperial might. Fridman and Aven might have been allowed to clinch a 50:50 partnership with BP, but they, unlike Khodorkovsky, had remained absolutely loyal to the Kremlin, and did whatever they could to stay in the driving seat of the joint TNK–BP venture.
Lee Raymond arrived in Moscow just a week later, apparently hoping to seal the deal. That day the Financial Times splashed on its front page the news that Exxon was deep in talks to acquire a 40 per cent stake in YukosSibneft for $25 billion, and the stake could later rise above 50 per cent.[84] But instead of handshakes and toasts, Raymond was greeted by the news that more than fifty investigators bearing machine guns and wearing bulletproof vests were raiding Yukos-related locations across Moscow, including the homes of some of Khodorkovsky’s closest partners, the other main shareholders in Menatep – who lived together in a guarded compound behind a high metal fence outside Moscow in the elite village of Zhukovka – among them Lebedev, who was already in jail.[85] When Khodorkovsky received a call from his wife that the police were swarming outside the door, he hurriedly made his excuses to Raymond and left.
The signalling from the Kremlin could not have been clearer. ExxonMobil was never going to get its deal. When Khodorkovsky received the call from his wife, he and Raymond had been attending a conference hosted by the World Economic Forum, at which Putin was due to make a keynote speech. But while Khodorkovsky rushed home to secure his house against the raids, all Raymond could do was warn the conference that Russia should not ‘arbitrarily’ restrict any investor if it wanted to participate in world markets.[86] Putin, as if blissfully unaware of the raids, continued to insist to investors that he was doing everything he could to remove hurdles to investment.[87] It was typical of the double-speak he had employed ever since he’d begun his rise to power. He spoke in praise of the market, while behind the scenes his security men were doing everything they could to seize control for themselves.
Still Khodorkovsky refused to back down, announcing to the world that he was ready to go to jail, if that was what it took to defend his company.[88] He would not leave the country and give up the fight. Privately, however, he’d been desperately seeking a way out, even visiting Pugachev, his old rival from the nineties who was by then close to the St Petersburg security men, to ask him about the Kremlin’s motivations. Pugachev, after making enquiries, had an unambiguous message for him. If he wanted to remain free he should leave the country. Otherwise, he told him, he was going to jail.[89] Khodorkovsky said he did not believe it. The Kremlin would not dare to arrest him – and if it did, the United States would step in to defend him.
It was a sign of his hubris, his overestimation of the lengths the US would go to to protect an oligarch who’d sought to build bridges with it.
*
Khodorkovsky was defiantly touring Siberia on a business trip when it happened. The prosecutors had called him in for questioning the previous day, but he was far from Moscow. Shortly before dawn in the morning of Saturday, October 25 2003, his private jet had landed at an airstrip in Novosibirsk to refuel when a squad of armed FSB commandos forcefully came on board. Khodorkovsky had been in a first-class compartment when they broke in on him, shouting, ‘FSB! Put your weapons on the ground! Don’t move or we’ll shoot!’[90] He was arrested on charges of large-scale fraud and tax evasion, and by the evening he was in Moscow’s notorious Matrosskaya Tishina jail.
This was the moment when Russia’s political and economic course turned irrevocably away from a Western-led global integration, and took a course of its own that was heading for collision with the West. It was the point of no return for the group of statist security men who had lobbied and plotted and eventually convinced Putin that there was no other way to ensure the Russian state’s resurgence – and their own financial clout. But it was uncharted territory as much for them as it was for the country. While few had expected things to go so far, many in the business community hoped there was a way back, that Khodorkovsky could be freed, and the two sides could settle. Even Pugachev said the expectation had long been, even among some of the siloviki, that Khodorkovsky and his associates would agree to pay Putin and his men a significant sum of cash to make the charges go away. ‘Everyone was waiting for the kickback,’ he said. ‘No one was really prepared. No one knew what to do with the company. They had no experience of running things then.’
Khodorkovsky’s arrest sent the entire business community into a state of shock. He was the country’s richest man, the most prominent proponent of the market, the man who’d been on the brink of pulling off the deal of the century – the sale of his company for $25 billion just seven years after he’d acquired it for $300 million. If he could be taken down, it could happen to any of them. The day Khodorkovsky was arrested, leading members of the Russian Union of Industrialists and Entrepreneurs, which had become the main official representative organ of the oligarchs, gathered for an emergency meeting in Moscow’s Baltschug Hotel. Many were too fearful to speak directly to the press, but collectively they wrote a muted and hesitant letter to Putin condemning the arrest and calling for an audience with him: ‘Only the clear and unambiguous position of the Russian president Vladimir Putin can improve the situation. Its absence will make the worsening of the investment climate irreversible and will turn Russia into a country unfavourable to those developing their businesses.’[91] Anatoly Chubais, the privatisation tsar and author of Russia’s liberal reforms, took the message a step further. In a TV interview that weekend, he warned that Khodorkovsky’s arrest, and the lack of clarity over whether other business leaders might be next, could lead to an ‘uncontrollable’ split in the elite that could draw in the whole of society.[92]
But Putin was not going to step back now. Though he consistently denied having anything to do with Khodorkovsky’s arrest, such things did not happen without a clear nod from the top. Above all, Khodorkovsky’s arrest showed that he’d failed to grasp a basic tenet of Putin’s rule that later other oligarchs – through his experience – came to understand all too well. ‘When you buy in Russia a large oil company for $150 million with the help of deposits from the finance ministry then you have to play according to Russian rules,’ said Dmitry Gololobov, a lawyer who once worked for Khodorkovsky but ended up turning on him. ‘You can’t say you are the legitimate owner. Privatisation didn’t create legitimate property. The other oligarchs understood this well. None of them claimed they were actually owners of the business. They understood they were just holders.’[93]
This way of thinking went against everything Putin had claimed to stand for when he ran for the presidency. It was a deception rooted in the KGB’s belief that they had made the tycoons when Russia began its transition to the market, that everything the new billionaires had won was owed to them. What happened to Khodorkovsky was revenge for the nineties, when the KGB had been forced to wait on the sidelines, pushed aside by the growing reach of the Western-leaning Moscow tycoons. ‘What’s happening now with Putin is the revanche of the KGB,’ said one former senior-level military-intelligence officer at the time. ‘The KGB created the oligarchy, and then they had to serve it. Now they are having their revenge.’[94]
The battle had reached a point where the KGB felt they could justify their asset grab by telling themselves they were preventing the handover of the country’s richest oil assets to the West. ‘Yukos had the intention to hand over the largest part of its assets to the West,’ said one of their number. ‘The capitalisation that [Khodorkovsky] built like lightning, all these assets would have floated abroad through fake offshore companies. If we had not stopped this, then we would not have kept control of our oil and gas industry. We would have become the servants of Western industrialists for a long time.’[95]
And so, over the days that followed Khodorkovsky’s arrest, the rest of the nation’s billionaires watched in horror as prosecutors seized his $15 billion stake in YukosSibneft. Putin firmly told them there would be no dialogue over the arrest, and the stock market went into freefall. On the Monday immediately after the arrest, Putin issued a brusque and unequivocal response to the oligarchs’ call for clarity: ‘There will not be any meetings or bargaining over the activities of law enforcement agencies, as long as these agencies stay within Russian law. Everyone should be equal before the law, irrespective of how many billions of dollars a person has on his personal or corporate account. Otherwise, we will never teach and force anyone to pay taxes and defeat organised crime and corruption.’[96]
It was a new era. Putin had cast off much of the hesitancy that had marked the first two years of his presidency. The Kremlin’s new masters were ready to carve up the country’s strategic assets for themselves. There was no way back, either for Putin or his men.