When Mikhail Khodorkovsky was led in handcuffs into a cramped Moscow courtroom in June 2004, a trial began that would change the course of the Russian economy and subvert the country’s justice system to the benefit of Putin’s men. Khodorkovsky hadn’t been seen since his dawn arrest on a Siberian runway. But now he was there, behind the bars of the metal cage in which Russia’s draconian courtroom rules dictated defendants sat, his fall from grace apparent to all. A trio of female judges with bouffant hair looked down, stern-faced, from a plywood tribune, while armed guards surrounded the cage.[1]
The heat in the tiny courtroom that summer day was stifling. Power-suited lawyers were squashed shoulder-to-shoulder on makeshift wooden benches with reporters and members of Khodorkovsky’s family, including his elderly parents. Dust hung in the air. From time to time, the cries of a handful of protesters shouting ‘Freedom!’ wafted in hopelessly through an open window. Dressed simply in jeans and a brown jacket, Khodorkovsky looked calm and intense as ever as he requested to be freed on bail. His detention for the past eight months in Moscow’s notorious Matrosskaya Tishina jail, he said quietly, was an illegal abuse of power that would embolden the state to persecute others: ‘My case is a precedent for justice in general; it will lead to hundreds of people being held in detention before their trials.’[2]
What emerged from the eleven-month-long proceedings, the hundreds of hours of cross-examination and courtroom testimony, was the case that created the foundations for Putin’s state capitalism. It opened the way for his KGB men to take control of the strategic ‘commanding heights’ of the country’s economy, and created a precedent for the country’s judiciary to be turned into an extension of the long arm of Putin’s siloviki. The trial helped transform the entire law-enforcement system – the police, prosecutors and the courts – into a predatory machine that took over businesses and removed political rivals for Putin’s ruling elite. By the time it was over, thousands of businessmen were being held every year in pre-trial detention, many of them released only when they agreed to hand over their businesses.[3] It was the crudest weapon the siloviki had in a legal arsenal that was eventually systematised for FSB and law-enforcement officers across the country on a scale large and small. The takedown of Khodorkovsky would give carte blanche to Putin’s security men to such a degree that by 2012 more than 50 per cent of Russia’s GDP was under the direct control of the state and businessmen closely linked to Putin, a huge and rapid turnaround since the time of the Khodorkovsky trial, when more than 70 per cent of the economy was in private hands.[4] It also fuelled a vast shadow economy of black cash for the resurgent security services, partly won from bribes in shakedowns that afforded a legion of FSB and other law-enforcement officers with tricked-out Humvees and palatial apartments far beyond the purchasing power of their official salaries. It gave the security men unfettered access to insider deals that won them trillions of roubles in cash to be stashed away and later laundered into accounts in the West.
The trial, to put it mildly, changed everything. It took place at the same time that Putin’s men were digging in for what they believed was the resurrection of their country against the forces of the West, against the backdrop of Beslan and the Ukrainian and Georgian revolutions. In their view, the takeover of Yukos was a crucial element in restoring the country’s imperial glory, in tightening control over the nation – and over its financial flows. At least, that was how they justified it to themselves then. ‘The KGB saw that they had created a Frankenstein’s monster which had a life of its own, called capitalism,’ said Khodorkovsky’s former adviser Christian Michel. ‘They saw how the oligarchs they’d helped create were now making billions, and they weren’t getting any of it. And so they began to take back the resources in the name of the country. They told themselves, “We’re taking back the resources which belong to the nation. Otherwise the Americans will buy control.”’[5]
This convenient myth-making was not only a driving motivation – it also allowed them to act as they wanted. In their view, they were the guardians of Russia’s restoration; they told themselves they were the saviours of Russia, and deserved to build their own fortunes. Like the Soviet leaders before them, they were the personification of the state, their interests were fully aligned. But whereas previously the state had been synonymous with the Party, they were about to create an era of state capitalism, in which the lines between the state’s strategic and their own individual interests were to be almost indistinguishable. ‘They painted it all in terms of a higher cause. But it was also for personal greed, and this is where the problems began,’ said Michel.
The idea that the state would take back the commanding heights of the economy had found ready support among a population that was as resentful of the Yeltsin-era billionaires as were Putin’s KGB men. Putin summed up the widespread ill-will when, just a week before Khodorkovsky’s arrest, he’d again lashed out at the nineties-era tycoons for trying to create a system of ‘oligarchic rule’: ‘We have a category of people who have become billionaires, as we say, overnight. The state appointed them billionaires. It simply gave out a huge amount of property, practically for free. Then as the play developed, they got the impression that the gods themselves slept on their heads, that everything is permitted to them.’[6] The Kremlin had even sought to portray the battle against Yukos as part of the fight against terrorism. Three weeks after the Beslan attack, by-then state-controlled NTV aired a curious hit job alleging – without presenting any evidence – that Khodorkovsky and his partners had financed Chechen terrorists.[7]
Sergei Ivanov, Putin’s close KGB ally from St Petersburg who now served as defence minister, had been the first to openly signal what was to come. ‘The state should not lose control over strategic sectors of the economy,’ he said in November 2003, a month after Khodorkovsky’s arrest. ‘We should have control over the level of oil extraction and over exploration … The Soviet Union invested huge resources in the exploration and development of fields, and now the heads of the oil companies are getting huge profits from this. In any case, oil wells and resources are state property, not private. So the state has the full right to control this process.’[8]
But though the signalling was clear that there would be a turnaround in how Russia was run, Western governments didn’t seem to think it was going to be as far-reaching as it was to prove. Initially, US officials struggled to understand whether it was a campaign that targeted Khodorkovsky alone, or whether it signalled a broader effort to take control of the energy sector.[9] They didn’t realise that it was the beginning of a takeover of the entire legal and political systems, or that the resources Putin’s KGB men were to accumulate would eventually be turned against the West. Though Sergei Ivanov had strongly indicated their desire to strengthen the control of the state, he and the rest of Putin’s men took care to insist that this did not signify an overturning of the nineties-era privatisations, that the case against Khodorkovsky was about one rogue oligarch, that property rights would be respected, and that Russia was still a market economy, set on integration with the West.
The sharp response to his arrest from the US administration that Khodorkovsky had been counting on, and had believed would lead to his swift release, never came. Instead, the reaction was muted. Individual politicians like Republican senator John McCain, as well as George Soros, the billionaire currency-trader-turned-philanthropist, called for Russia to be turfed out of the elite G8 group of industrialised nations, which had only expanded to include it after Putin took the presidency. But only McCain seemed to recognise the potential consequences of the state onslaught against Yukos: ‘A creeping coup against the forces of democracy and market capitalism in Russia is threatening the foundation of the US–Russia relationship and raising the spectre of a new era of cold peace between Washington and Moscow,’ he told the US Senate in response to Khodorkovsky’s arrest. ‘The United States cannot enjoy a normal relationship, much less a partnership, with a country that increasingly appears to have more in common with its Soviet and tsarist predecessors than with the modern state Vladimir Putin claims to aspire to build.’[10]
But for the administration of George W. Bush, it was mostly business as usual. In those days, in the wake of the September 11 terrorist attacks, the focus was on counter-terrorism cooperation. It was thus important to keep the lines of communication with Russia open, especially now that Russia had begun to convince the West of the links between Chechen rebels and the global terrorist cause. The US was also becoming ever more dependent on Moscow’s assistance in Afghanistan, including through the provision of a transport route through Russia for war materiel. ‘At a minimum the administration didn’t want Russia to get in the way of what the US wanted to do,’ said Thomas E. Graham, the then director for Russia on the US National Security Council. ‘For instance, there were disagreements over Iraq, and at best it wanted assistance in counter-terrorism, as we saw in Afghanistan.’[11]
Nevertheless, the administration raised concerns about Khodorkovsky’s jailing and the state takeover of Yukos in several communications with the Kremlin, said Graham. ‘But the administration wasn’t focused on domestic developments inside Russia that much then.’ It hadn’t seemed at the time that Russia was stepping back from democracy, he said, while Putin’s efforts to rebuild the power of the state apparatus was not seen as a bad thing, after the chaos of the Yeltsin years. The forced departures of the media tycoons Vladimir Gusinsky and Boris Berezovsky, and the handover of their TV channels to the state, were seen as an internal affair. Neither was viewed as a supporter of democracy, said Graham. They’d used their media empires to peddle their own agenda.[12] Khodorkovsky, however, had risen to become a different class of oligarch ever since he’d begun to cast off his robber-baron image and started to pursue better corporate governance – as well as the sale of his oil company to the US. ‘But from the standpoint of the administration this was not a big deal that was going to cause us to step back and change policy towards Russia.’[13] Essentially, for all his efforts to cultivate ties in America, the US government had thrown Khodorkovsky to the wolves.
For global investors who’d bought into Russia’s market transformation, however, the arrest of Khodorkovsky and the subsequent takeover of his company was much more significant. From the moment of the arrest and the state’s freezing of Khodorkovsky’s 44 per cent stake in Yukos, investors’ eyes had been trained on the company, and whether the state would seek to use Khodorkovsky’s trial to dismantle it. Yukos was Russia’s number-one oil producer, extracting more oil than Kuwait. It had become the country’s most well-known company, a flagship for Western investment, and any state move on it could portend a broader overturning of market reforms. Investors feared that the longer Khodorkovsky stayed in jail, the greater the risk that the siloviki would seize his company, which would ruin the investment case for the entire Russian market.[14] They feared a repetition of Gusinsky’s treatment over NTV, and Khodorkovsky’s detention being used to force him to hand over his shares, tactics first honed by Putin’s KGB men in St Petersburg. Despite high global oil prices and a resurgent economy, the Russian stock market was one of the world’s worst-performing that year, and Yukos shares had lost more than half their value since their peak the autumn before.[15] Khodorkovsky’s closest partner Leonid Nevzlin had already proposed that Menatep shareholders cede control of Yukos to the state in return for the release of the ‘hostages’, explaining that he was making public what he heard from intermediaries offering backroom deals every day.[16]
But in this case, such proposals went down like a lead balloon with Putin’s Kremlin, which was still desperate to keep Western investors – and the West in general – on side. The KGB men understood that every step they took had to be considered carefully. The process of jailing Khodorkovsky on charges of fraud and tax evasion had to look legitimate, part of a process that justified the state’s break-up and takeover of Yukos and that, from a certain viewpoint, could be seen as acceptable in the eyes of the West. In those days, Putin’s circle still feared the consequences of international court cases. They were keen to ensure Russia’s deeper integration into global markets, and they knew they needed Western investment to continue the country’s economic recovery, and to build a brand of state capitalism whereby they could expand – and infiltrate – into the West without being perceived as a threat.
So instead of crudely seizing Menatep’s holdings in Yukos, they embarked upon an elaborate legal campaign in which the trial of Khodorkovsky was just one element of death by a thousand cuts. What emerged was the beginnings of a sophisticated process whereby tightly-controlled judicial orders and the court system were used as cover for the siloviki’s expropriation.[17]
It was a process made altogether easier by the no-rules transition of the nineties, when the oligarchs, including Khodorkovsky, had been able to skew the environment in their own favour, riding roughshod over the rights of minority investors and others, while privatisations had been rigged. Most businessmen then had operated almost in a legal vacuum, the state having become so weak it could barely enforce any laws. The court system and law enforcement were essentially up for sale. But now that Putin’s KGB men had taken over the Kremlin, they began to reverse the situation entirely. In the Khodorkovsky case, the bottom line was the court rulings were essentially dictated by the Kremlin. The hearings were full of procedural violations, laws were applied retroactively and selectively. Instead of seeking to strengthen institutions in order to erase the abuses of the past, Putin’s allies simply took them over, giving themselves the monopoly on abusing power.
They were assisted by the fact that many Russian laws were full of loopholes, making it easy for anyone to be accused of transgressing them. In such an environment, laws were open to interpretation, and meant far less than a system of mafia-type ‘understandings’, or agreements between friends, under which you had to stay on the right side of the Kremlin if you wanted to survive.
By the time Khodorkovsky faced the first day of his trial, Yukos had warned that it was on the brink of bankruptcy. Prosecutors had embarked on a parallel attack to besiege the company, retroactively levying $3.4 billion in back taxes for the year 2000 against it. Investors feared that the intention was to deliberately bankrupt Yukos, so the state could take control of it. Foreign creditors already feared that the company would be unable to pay a $1 billion loan.[18] Government officials led by the finance minister Alexei Kudrin, a liberal-leaning technocrat, had long been frustrated by the oil companies’ use of domestic offshore zones to minimise tax payments. But Yukos was far from the only company to use such schemes, which had been legal under Russian law at the time. The effective tax rate Yukos paid was on a par with that of other privately-owned oil companies, such as Roman Abramovich’s Sibneft and TNK-BP.[19] While investors feared that similar back tax claims could be deployed against others, the Kremlin and subservient Western bankers were anxious to insist that the case was about Khodorkovsky alone.
It was a measure of the Kremlin’s sophistication that, the day after Khodorkovsky’s first appearance behind bars in the Moscow courtroom, Putin went public with rare reassurance for investors about the case. On an official visit to the neighbouring former Soviet republic of Uzbekistan, he played the magnanimous leader, further underlining the turn in Khodorkovsky’s fate. ‘The official authorities of the Russian Federation, the government and the country’s economic authorities are not interested in the bankruptcy of a company like Yukos,’ he said. Relieved investors sent Yukos’s stock price surging 34 per cent in the space of a day. But Putin left himself a get-out clause, by which the pretence of due process in an independent court system gave cover for the state asset grab: ‘The government will do all it can to prevent the collapse of the company. But what happens in the courts is a separate matter. The courts should speak of this themselves.’[20]
He didn’t mention, of course, that everything that happened in the courts was by then directly under the control of his closest associate, Igor Sechin, his deputy chief of staff, who had overseen and propelled the legal attack on Khodorkovsky since its start. As if to ensure close coordination, Sechin had even become part of the family of the prosecutor general, Vladimir Ustinov: his daughter had married Ustinov’s son in November 2003, just as the legal attack was launched. From his perch overseeing the campaign, the stooping former KGB officer had seen nothing but opportunity.
For Sechin, the Yukos case was a unique chance to raise his standing from that of Putin’s ever-obsequious servant. For years he had carried Putin’s bags and stood guard over access to him; now he could turn the position to his own advantage. A Kremlin insider once complained to me that Sechin had deliberately lost a directive he’d agreed with Putin: ‘Everyone was asking where it was. It hadn’t been published. Putin said he’d signed it and given it to Igor … I went out to Sechin and he said, “Oops, it must have fallen behind the cupboard. I have so many papers here.” And so it went on. He was doing it to show he was the one who makes decisions, and who decides whether things get done or not, and that I should go to him to decide things.’[21]
With the Yukos case, Sechin had an opportunity to expand his power base and create a fiefdom of his own. ‘He understood that it was a chance for him to kill two birds with one stone,’ said Alexander Temerko, one of Yukos’s former significant shareholders. ‘To take the asset and to use the case to take control of law enforcement.’ When Sechin’s daughter married the prosecutor general’s son, ‘it became a family business’.[22]
Temerko was the sole Yukos shareholder who remained in Moscow to try to seek a way out of the impasse. All Khodorkovsky’s other remaining business partners with whom he’d founded the Menatep empire, including Nevzlin, had fled Russia, mostly for Israel, fearing arrest. But Temerko was different. Three- and four-star generals had once worked under him, and essentially he was untouchable.[23] Early in Yeltsin’s presidency he’d served as head of a state military committee. He’d become close to a series of Yeltsin-era defence ministers and run a strategic state arms conglomerate. He’d known Khodorkovsky since his days in the Komsomol, and he helped Yukos win a major contract to supply the army with fuel.[24] Temerko was the ultimate lobbyist. He was charming and irascible, with a round belly and a thick moustache. If anyone was going to be able to negotiate a solution to the standoff with the Kremlin, it was him. He straddled the world between Khodorkovsky and the murky security men who ran Putin’s Kremlin – his business partners said he was close to Nikolai Patrushev, the hawkish FSB chief.
Western investors were placing their hopes for negotiations in the two American oilmen who remained as Yukos’s senior executives: Steven Theede, formerly of ConocoPhilips, and Bruce Misamore, a Texan from Marathon Oil. Both were well-versed in Western management techniques, hardworking Americans who took the Moscow subway to the office. But they were far out of their depth in the Byzantine labyrinths of Kremlin negotiations. Temerko was the only person fit for that. Behind the scenes, he took on the mantle of backroom broker, sometimes sitting for eight hours on end in Sechin’s Kremlin anteroom waiting for a chance to talk. On one occasion he tried to get around Sechin and take his case directly to Putin, agreeing with a senior Kremlin official that he could sneak out of the back entrance of a meeting of the Security Council to intercept the president. But Sechin found out about the plan, and angrily blocked his way. ‘It was Sechin’s job to personally hand over sensible proposals to the president,’ said Temerko. ‘But he was always saying, “This is not correct, this is not sensible.” And we would go back to the drawing board.’[25]
From the beginning, Khodorkovsky’s men were fighting a losing battle. Early in July, less than three weeks after Putin’s reassuring comments, the pressure on Yukos was raised further. The system the president was building showed its true face. Dozens of government agents raided Yukos’s headquarters in one of Moscow’s shiniest new office towers, seizing computer servers and then freezing the company’s bank accounts.[26] As if for good measure, tax officials carrying guns personally delivered a new back tax bill for $3.4 billion for 2001 to Steven Theede. This doubled the tax charge facing the company at a time when it hadn’t been able to pay the previous one, and the deadline was about to run out. ‘This will kill it,’ said Igor Yurgens, a senior member of the oligarchs’ lobbying group.[27]
In the days that followed the raid, Khodorkovsky went public from his jail cell with another offer to hand over Menatep’s share in Yukos in order to pay down the tax debt.[28] Yukos’s senior management team, led by Theede and Misamore, had proposed a restructuring plan that would allow the company to pay off $8 billion in back taxes over three years – if only the government would unfreeze Yukos’s accounts to allow it to do so.[29]
All of these efforts came to nought. The negotiations continued throughout July, when all of a sudden the government side announced that, instead of accepting any of the restructuring plans, it intended to sell off Yukos’s main production unit, Yuganskneftegaz, to cover the tax bills.[30] It alone produced 60 per cent of Yukos’s total output, more oil than Libya. The decision sent shockwaves through the market once again. The break-up of Yukos had become reality. Just days after the announcement, Sechin, who was coordinating the attack behind the scenes, tipped his hand. He’d been appointed chairman of the state-owned oil company, Rosneft,[31] and rumours that Rosneft was pursuing Yukos’s assets for itself suddenly gained weight.
With each coordinated blow against Yukos, Sechin had been growing in power. He was turning from trusty Putin deputy, fierce gatekeeper and controller of information and access to the president into a powerful player in his own right. Throughout the negotiations he’d played the servile assistant, offering to speak to the tax ministry and the justice ministry, and to funnel proposals to Putin, in order to help Menatep’s negotiations along. ‘In the beginning he would try to distance himself. He never said he was leading the process,’ said Temerko. ‘But each time we thought we were reaching an understanding, they would arrest another account so that we wouldn’t be able to pay.’ Sechin would shake his head regretfully and tell Temerko how sorry he was that they hadn’t been able to agree. ‘He would tell us we weren’t capable of agreeing. But actually his position was to push us into more and more compromises and disclosure of information.’[32]
Still the government sought to keep Western investors on side. It promised a sale of Yukos’s main production unit, Yugansk, at a fair market price; but the task of conducting the valuation was entrusted to the Moscow branch of Dresdner Bank, headed by one of Putin’s closest allies, Matthias Warnig, the former Stasi agent who’d worked with him in Dresden.[33] Amid the drip-drip of information and the steady stream of new attacks, the Western market was becoming accustomed to the idea that Yukos would be broken up, and by the time the government announced the Yugansk sale, Western oil majors were offering to help take it off Khodorkovsky’s hands. These offers undermined the US administration’s warnings to the Kremlin about the Yukos case. ‘The problem was, every time we told the Russians that what they were doing would have a negative impact on the investment climate in Russia, one of the Western companies would come forward and make an offer to buy Yukos,’ said Thomas Graham. ‘There were two or three proposals that went to the Kremlin then offering to buy up Yukos shares and help alleviate the problems Russia would have with its image.’[34]
The offers also served to confirm Putin’s long-standing cynical view that anyone in the West could be bought, and that commercial imperatives would always outweigh any moral or other concerns. And soon the Kremlin was launching a major new charm offensive to win Western investor support for the state’s asset grab.
*
By this time the Kremlin had begun to operate fairly slickly. Behind the scenes, Western investment bankers, including Charles Ryan, the US citizen who headed another Moscow brokerage, United Financial Group, were advising the government on the Yukos takeover. When Putin announced in mid-September that he was overturning one of the biggest achievements of Russia’s transition to democracy, the election of governors, in response to the Beslan tragedy, the news might have looked ominous against the backdrop of the state’s increasingly clear efforts to break up and take over Yukos.
But Putin had a pleasant surprise for foreign investors. The day after the Kremlin announced the end of elections for governors, it told the market it planned to create the world’s biggest energy major, merging the state-controlled gas giant Gazprom with the state’s last remaining oil major, Rosneft, to create a behemoth that would control the world’s second-biggest reserves, behind only Saudi Arabia’s Aramco, and five times larger than its nearest counterpart in the West, ExxonMobil. Unlike Aramco, it would be open for Western investors to take a stake in.[35]
The proposed deal was testimony to the audacious global ambition of Putin and his circle at a time when Western interest was growing in Russia’s role as an energy supplier, due to the turmoil in the Middle East. It was a big turnaround from only six months previously, when prime minister Mikhail Kasyanov had wanted to break up Gazprom under liberal reforms to reduce its monopoly hold over the gas sector. Putin had rejected that out of hand, and the new plan to merge the gas monopoly with Rosneft was a stark symbol of the government’s intentions for state domination of the energy sector.
Yet for Western investors, the news was good. The strengthening of state control over the economy, which they’d long feared, was paired with the enticing prospect of a slice of a huge new energy giant. The deal would increase the state’s stake in the merged GazpromRosneft to a controlling 51 per cent, automatically lifting restrictions on the amount of stock foreign investors could hold in Gazprom. Plans to lift these restrictions – known as the ‘ring fence’ – had long been contemplated by Putin’s government; now it appeared that they had finally got the green light, immediately boosting the share price. Western investors salivated at the money they could make trading the proposed new state behemoth. ‘This will be the largest oil-and-gas company in the world that foreigners can invest in, at a time when oil and gas prices are going through the roof,’ said William Browder, the head of Hermitage Capital Management, which held a significant chunk of Gazprom shares,[36] adding that it was ‘some sort of sugar to help the Yukos medicine go down’.[37] Ian Hague, head of the New York-based Firebird Fund, described the Kremlin’s proposal more directly: ‘They are buying off the loyalty of the foreign investor community as they create what looks like a political dictatorship. And it’s working.’[38]
It was the beginning, for some, of a beautiful friendship, as the Kremlin signalled that foreign investment was welcome as long as Putin’s men were in control. The unease about the takedown of Yukos died away as investors lined up to join the new state giant. The only person who didn’t seem pleased by the prospect was the Rosneft chairman Igor Sechin, as the planned tie-up between Rosneft and Gazprom threatened to bring down the curtain on his dreams for a state energy giant of his own.
Even as Sechin seethed, the drama surrounding the proposed Yugansk sell-off was far from over. A leaked report said Dresdner Bank had valued the production unit at between $15.7 billion and $17.3 billion, which seemed in line with what the market believed was a fair price,[39] and led Yukos’s Western managers to believe that there would be cash available to keep the rest of the company together after the sale of Yugansk. But at the end of November that year, any hope of that was irretrievably dashed when the justice ministry not only announced an opening price for the government auction of Yugansk of $8.65 billion, well below the Dresdner range, but also presented Yukos with two more enormous tax claims for 2002 and 2003.[40] These brought the tax bill facing Yukos to a monumental $24 billion, more than four times the company’s battered market capitalisation. For Yukos’s management it was all too clear that this was game over, and that the rest of the company was going to be broken up and sold for a knockdown price.
If the message hadn’t been resounding enough already, the night before the new tax charges were announced, armed police raided the homes of dozens of Yukos managers, who said the move recalled Stalin’s purges of 1937. They were ‘afraid of being at their home at night, afraid for their relatives’, said one of the managers.[41] The point was also driven home to the Western oilmen Khodorkovsky had brought into Yukos as a symbol of its move to better governance. Bruce Misamore, the affable chief financial officer from Texas, had been in London that day. As he weighed whether or not to risk flying back to Russia, he received a call from Temerko, who warned him that he would be arrested on arrival.[42] Misamore never returned. The same went for Steven Theede, who’d served as Yukos’s president since June 2004. He too was out of the country on business that day, but a police raid on his office sent a clear signal that he should not go back to Moscow. The low sale price announced by the government for Yugansk, he said, represented ‘government-organised theft to settle a political score’.[43]
For Bruce Misamore it had become clear that all the management’s efforts to reach a settlement had been in vain. The last-minute flurry of tax claims, taking the total to over $24 billion, would allow all of Yukos’s assets to be sold off piece by piece to state-controlled companies. Misamore believed this had been the Kremlin’s goal from the start. The asset and bank-account freeze ensured that the company would never be in a position to pay down the debts. ‘At first we thought that if we paid the money, they would maybe go away,’ he said. ‘We used many different ways to try to access the right people in the Kremlin to negotiate a settlement. They would lead us on, and we would think that we were very close to a settlement, but then someone would meet Putin and the whole thing would get dropped.’[44]
For Alexander Temerko too, it was finally apparent that the negotiations had been a road to nowhere, that Sechin, Putin and his men had been using them as cover for the takeover, as they’d needed to lull the market and foreign leaders into a belief that due process was being observed. But ultimately, said Temerko, ‘We were being lied to. They sent all these false messages. Some senior people in Putin’s circle had told me, “This is all a game.” They said, “If they have started gnawing at the company, they will gnaw at it to the end, till they have gotten down to the bones.” They probably thought they should show some process, some readiness to negotiate. But when everyone got used to what was going on, they took the view, “Why should we agree? It’s all ours anyway.”’ The Dresdner Bank valuation, the constant dangling of potential deals, were ‘typical Chekist manoeuvres. They gave out false information and then got on with their own business on the side.’
It was a tactic that was to be repeated by Putin’s Kremlin again and again, right up to Russia’s seizure of Crimea from Ukraine many years later in 2014. Then, they would claim at first that the sudden appearance of troops on the ground in Crimea had nothing to do with them. But once the annexation of Crimea had been secured, Putin admitted that they were Russian forces. ‘They lied to Western heads of state,’ said Temerko. ‘They told them we were criminals, but that they were not going to take the company from us, they just wanted to find a common language. Putin said many times, “We don’t want to bankrupt Yukos.” But then they did. Yukos is when they first learned how to lie. The lies are professional by now.’[45]
As Russia prepared to sell off Yugansk, a fight was breaking out between the two main factions within Putin’s security men for the spoils. Emboldened by Putin’s backing for a merger with Rosneft, Gazprom, the country’s state gas giant, had become intent on acquiring Yugansk too. It had the backing of the more liberal-leaning technocrats in Putin’s government, led by Alexei Kudrin, the finance minister, who were keen to ensure that the power of Sechin, as chairman of Rosneft and their biggest rival and the leading and most hawkish member of the security bloc, increased no further. They were pushing for Yugansk to be sold at a fair market price, and wanted Gazprom to have a Western stamp of approval for the acquisition through the backing of Western institutions providing billions of dollars in loans.[46] They believed such an outcome would produce a more palatable version of state capitalism, and the West was more than willing to engage on those terms. By the time the auction was due to be held, Gazprom had lined up the biggest loan in Russia’s corporate history – more than $13 billion from a syndicate of banks led by Germany’s Deutsche Bank and Dresdner Bank.[47] It had also won the backing of the same US energy majors, Chevron and Exxon, which had once been on the brink of a deal with Khodorkovsky but were now ready to turn on him. Now they were discussing taking a slice of the Yugansk sale in a consortium with Gazprom, according to two people with knowledge of the matter,[48] while the UK’s Royal Dutch Shell was also in talks for a stake.
To Putin this was yet another example of how, for the West, commercial considerations outweighed concerns over the direction of democracy. But for Khodorkovsky’s partners there could never be even a patina of respectability to the sale, and Kudrin’s attempts to lend it legitimacy through the participation of Western institutions and companies represented nothing more than a cover-up, and a sellout of principles by the West. In their view the Yugansk sale was outright theft, and they had to do everything in their power to stop it going through.
Everything had been prepared for what promised to be the sale of the Kremlin’s new century, the auction whereby one of the biggest prizes in the oil industry was to be returned to the hands of the state – with the approval and participation of Western banking institutions and oil majors to boot. But just four days before the Yugansk sale was due to be held, Yukos’s senior management, still led by Theede and Misamore from exile in London, dug in for a final act of defiance. The blow came without any warning: they’d quietly filed for Chapter 11 bankruptcy for Yukos in a Houston court, and won a temporary stay to halt the sale.[49] All of a sudden, Gazprom’s Western backers fell away.[50] The Yukos managers had argued that the company fell under the protection of the US legal system because US minority investors held a 10 per cent stake, while the oil major itself had ‘significant business’ in the US.[51]
The last-minute move sent Putin into a vituperous rage. ‘I’m not sure [the judge] even knows where Russia is,’ he snapped.[52] Insisting that the US courts had no jurisdiction over what happened in Russia, the Kremlin pressed ahead with the sale. But for Gazprom, the risks of bidding in the auction had become too high. Its ownership of a web of assets in the West – storage facilities, trading hubs and joint ventures for gas distribution in Europe – left it open to lawsuits should it seek to bid in the sale and violate the US order. Instead, the way was cleared for Igor Sechin, the silovik many in the banking community had begun to name ‘the dark lord’ for his propensity for scheming and his ruthless ambition, to make another bid for Yugansk. His Rosneft oil major had no assets in the West.
The sale of Yuganskneftegaz was meant to mark the opposite of the backroom loans-for-shares auctions that had transferred the crown jewels of Soviet industry into the hands of a handful of well-connected tycoons at discount prices. Though Yukos had decried it as theft, the Russian government was seeking to present the sale as obeying the normal rules of the market. As if to underline the difference from the closed-door sales of the nineties, journalists had been invited to observe the auction, broadcast live on two screens in the plush red conference room of the Russian Federal Property Fund.[53] It was meant to set a new precedent for transparency. But the last-minute bankruptcy filing in the Houston court meant the sale ended in farce. It was still broadcast for the journalists, but there was only one bid, and no one knew who was behind it. Of the two sets of besuited executives sitting behind desks in a small wood-panelled room, only one was identified. They were from GazpromNeft, the oil arm of Gazprom created just weeks before. The other two executives – a tall man in a grey suit and a thickset woman wearing glasses – were completely unknown. Their company had registered to take part in the auction only three days before, yet they were the only ones to bid. The tall man solemnly raised his paddle to bid $9.37 billion, just $500 million above the opening price, while the executives from GazpromNeft made a telephone call and then did not bid at all. The much-anticipated sale was over with a sudden bang of the auctioneer’s gavel almost as soon as it had begun.
The oil-production unit that produced more oil than Libya had been sold to an outfit, later named as Baikal Finance Group, that no one had ever heard of. Even the chairman of the Federal Property Fund, Yury Petrov, had no idea about it at all. ‘We know nothing about this company,’ he said.[54] It turned out that Baikal Finance Group had been founded just two weeks before, in a pre-Revolutionary building above a bar named ‘London’ in the provincial Russian town of Tver.[55] No one seemed to know who the owners were.
But Putin knew exactly who was behind the winning bid, and told everyone not to worry. The individuals behind the company had ‘years of experience in the energy sector’, he said.[56] It turned out that they were connected to two of his closest allies, one of whom Khodorkovsky had trampled on when he took over Eastern Oil company, or VNK, in the nineties: Gennady Timchenko, the oil trader who’d worked with Putin in St Petersburg, and Andrei Akimov, the former Soviet state banker who’d financed Timchenko’s oil trader and launched a rival bid for VNK. The executives who had actually bid for them at the auction were identified as mid-level managers from Surgutneftegaz, the Kremlin-loyal oil major.[57] Surgutneftegaz was the chief supplier to Timchenko’s oil-trading company, and by the time of the Yugansk sale he controlled a significant stake in it, according to Vladimir Milov, the former deputy energy minister, a former Timchenko partner, and a senior Russian banker who worked with Timchenko.[58] Timchenko has said he only ever owned less than a 0.01 per cent stake in Surgutneftegaz. His lawyers said he had no connection to or ownership interest in Baikal Finance Group.
Putin’s KGB allies had finally taken revenge on Khodorkovsky for squeezing them out of VNK. They’d landed the first and biggest piece of Yukos after more than a year of behind-the-scenes manoeuvring persuading Putin to take Khodorkovsky on. They seem to have hastily cobbled together Baikal Finance Group as a front company to minimise transparency over its participation in the sale and avoid legal consequences from the US court order. Within four days of the sale, Baikal Finance Group sold Yugansk on to Sechin’s Rosneft.[59]
Overnight, Rosneft grew from being a minnow worth no more than $6 billion to an oil giant of global stature with assets worth nearly $30 billion, strengthening Sechin’s hand along the way. Instead of bringing a halt to the sell-off, Yukos’s bankruptcy suit had resulted in creating a new powerhouse for the silovik who’d orchestrated much of the legal campaign to bring down Yukos.
If Gazprom had been able to acquire Yugansk cleanly, without legal risk, then Rosneft would most likely have been merged into Gazprom too, removing a key asset from Sechin’s sway. Though powerful, Sechin would have remained a bureaucrat. But now the company he chaired had become a new state oil champion, and he had gone from backstage Kremlin player to a real economic force in his own right. His increased stature heralded problems for the much-vaunted merger of Rosneft into Gazprom. Sechin wanted Rosneft to remain an independent power.
For one of the Western bankers who’d worked closely with Gazprom on raising funds to acquire Yugansk, the Houston court filing was nothing less than a calamity that had skewed the process towards strengthening the siloviki. To him, the liberal technocrats, led by Kudrin, who had backed Gazprom were a more benign force who would have ensured a more investor-friendly climate in Russia in future. ‘We were preparing a deal that might have improved transparency and increased Western influence,’ he said. ‘We were going to have one of the original firms that were planning to come, like Exxon, Chevron or Shell, take a slice of the deal. We were going to bring in one of these firms to be a strategic partner. But then there was the injunction, and the bad guys rushed back in. The power, influence and career path of Igor [Sechin] was to be dramatically curtailed. This was one of the crazy things about that stupid US judge.’[60]
If the Western banker truly believed the sale of Yugansk to Gazprom would have improved due process, he was probably deluding himself. What mattered was that its sale was effectively a state expropriation, triggered by the government selectively applying tens of billions of dollars in back tax charges for schemes that had been legal at the time. Any participation by Western banks would have been no more than window-dressing, while the disappointment of the technocrats was probably no more than Kremlin infighting over the spoils. A sale to Gazprom might have looked more palatable to the West, but the end result would have been the same.
For Sechin, however, it was without doubt a victory. For transparency – and for the Russian budget – it was undoubtedly a further loss. The sale that was to be financed by Western banks ended up being paid for through a murky deal that involved funding from the Russian budget. Although the Yugansk sale had ostensibly been forced through to pay off billions of dollars in back taxes to the Russian budget, central bank data showed that the federal treasury ended up transferring $5.3 billion through the state-owned Vneshekonombank to Rosneft to help pay for the purchase.[61] One of the biggest scandals of the loans-for-shares sales of the nineties was the widespread belief that the oligarchs had dipped into federal treasury funds held in accounts in their banks to finance them. Now it appeared that Rosneft had done almost exactly the same. But this time there was barely the whiff of a scandal. Only one newspaper, the business daily Vedomosti, reported the scheme, and only one state official raised his voice. The funds were only paid back to the treasury in 2005, when Rosneft and Vneshekonombank clinched an emergency funding deal for $6 billion from Chinese banks as part of an oil-supply deal whose terms were never disclosed.[62]
The sole official within the Kremlin to protest against the sale, which he described as ‘daylight robbery’,[63] was Andrei Illarionov, a liberal economist who’d been Putin’s economic adviser since the earliest days of his presidency. The funding for the acquisition from the federal treasury, he said, laid bare the pretence that it was all about collecting back taxes. Illarionov, who was widely respected for his principles, was growing increasingly uneasy. He didn’t know how long he could remain in his post when the country was turning definitively away from any version of a liberal market, and the emerging state capitalism looked so corrupt. He’d already been demoted from one of his main roles because of his criticisms. The official explanations for the legal attack against Yukos ‘didn’t have a leg to stand on’, he said. ‘At issue is not the existence of tax arrears, because nobody was interested in tax arrears in this case. The company had started to pay down the tax arrears when it had not even admitted them … They were prepared even to pay these fantastic amounts, but no one was interested in that.’ The entire campaign of back tax bills against Yukos had, he believed, been cooked up to seize its assets. Putin’s Kremlin ‘gave up receiving additional tax payments in order to obtain property. This is the most dramatic and the most candid statement of their genuine interest in the Yukos affair.’[64]
In the months and years that followed, the institutions of the West bowed to Putin’s new economic order. The way had eventually been cleared thousands of miles from Moscow in a courtroom in Houston, Texas, where in February 2005, two months after the sale, a judge finally dismissed the merits of Yukos’s case for bankruptcy protection following strong arguments from Gazprom’s legal representatives, the powerful Texas law firm Baker Botts. Though a temporary stay had been issued in time for the sale, after considering all arguments, the judge ruled that Yukos did not have sufficient presence in the US to receive the protection of the US courts.[65] The decision had essentially given the all-clear for the break-up of the rest of Yukos. The way was opening up for Western companies, hungry for a piece of the action, to participate in the further bankruptcy sell-off of Yukos assets.
When the ruling came, said Temerko, ‘it became clear to me that the battle was over, that the US was not going to stand in the way’.[66] Till then, he said the Kremlin had been nervous that the US might retaliate. But although the US State Department had continued to quietly condemn the sale, the prospect of further Western outcry that Khodorkovsky and his partners hoped for gradually fell away. Instead, the oil giants of the West began to line up with ever greater zeal to take part in Putin’s new order, to become investors and partners in the newly endowed Rosneft. Deutsche Bank and Gazprom’s Western lawyers, in particular, were helping ease the way. A key player remained Charlie Ryan, the head of the Moscow brokerage United Financial Group, in which Deutsche Bank had bought a 40 per cent stake in late 2003. He’d worked to help Gazprom line up Western loans, and then introduced the state gas giant to Baker Botts, which fought strongly against the petition for bankruptcy protection in Houston on its behalf.
Ryan had taken Russia’s campaign to gain the approval of the West to one of the US’s most prestigious law firms, at the heart of the Republican establishment. Baker Botts’s backing for the Kremlin, and for its energy giants Gazprom and Rosneft, followed a model it had already honed in many of the world’s autocratic regimes, where for decades it had been a supporter of major US oil company interests. The firm’s main partner, former US secretary of state James Baker, had been introduced to Alexei Miller, the close Putin ally who served as Gazprom’s chief executive,[67] and over breakfast in the grand dining room of the Hotel Rossiya, just across the way from the Kremlin, he had been convinced to take on Gazprom’s defence. ‘I told him Khodorkovsky was a murderer,’ said one of the Western intermediaries involved in the process. ‘Baker is very sophisticated.’ He’d immediately understood.
A bit of moral relativism had helped win the Texan law firm over. The men they were dealing with in Russia seemed mild in comparison to some of the leaders they’d worked with in the Middle East. ‘Of all the places in the world where God in His infinite wisdom decided to put oil, Russia seemed one of the more civilised regions compared to the rogues’ gallery they were dealing with in Gaddafi and Saddam Hussein,’ said the Western intermediary. ‘Up against that crew, Alexei Miller looked like a schoolboy.’[68]
But Miller, a bureaucrat who’d served in the foreign relations committee in the St Petersburg mayor’s office, was no more than a deputy for Putin. Even if he did look a bit like a schoolboy, it didn’t matter, because at Gazprom Putin called the shots. For Baker Botts, however, the new relationship was to prove lucrative. It was to work closely with Gazprom and then Rosneft for more than a decade, eventually opening the way for Exxon to form a strategic $3.2 billion tie-up with Rosneft to jointly explore the Arctic and the Black Sea in the search for new oil reserves.[69] It assisted Rosneft’s defence against lawsuits filed by Yukos managers and by Menatep over the state expropriation. Emails show that it even appeared to help Rosneft in the subversion of the rule of law, assisting in the preparation of rulings drafted by Rosneft’s lawyers for an Armenian court as the state oil giant defended itself against litigation filed by Menatep.[70]
The fallout from the Yugansk sale had helped Putin find a crucial weakness in the West’s armour: ultimately, financial interests would outweigh concerns about his regime’s abuse of the law and democracy. It was part of a widespread complacency – and to some degree arrogance – in the West that Russia no longer represented any danger, that after the break-up of the Soviet Union the collapse had been so deep that all that remained for the West was to find a way to take a share of its energy wealth, while the country’s integration into Western markets would mean that, with time, it would become part of a Western-dominated globalisation where it would abide by the same rules as other nations. But for Temerko, the US looked to have agreed to a non-aggression pact with Russia that had given the green light for Putin and his men to act as they liked.
The way was being opened for the Kremlin to control ever greater cash flows, which one day would enable it to challenge the West. Its takeover of the oil sector received a further Western stamp of approval in the summer of 2006, when Rosneft launched a $10.4 billion initial public offering of its shares on Western markets. By then the company had been valued at nearly $80 billion, a huge increase on its $6 billion valuation before the Yugansk acquisition. BP took a slice worth $1 billion, and other international oil majors also bought significant shares.[71] Investors worldwide were betting on continued Kremlin backing for the state oil giant’s takeover of the rest of Yukos, as well as soaring global oil prices. All of this served to legitimise the Putin regime and enable its further integration into Western markets, expanding the Kremlin’s reach. The possibilities were potentially limitless. ‘Before, they only thought about coffee and maybe a bit of salad,’ said Temerko. ‘But when they brought the salad, it turned out they could eat the entire buffet. Appetite comes during eating,’ he sniffed.[72]
When the rest of Yukos went under the hammer in a series of bankruptcy auctions in 2007, Western oil majors and financial institutions facilitated the process. In fact, they provided convenient cover for Putin’s men. First, a consortium of Western banks led by France’s Société Générale – and not the Russian state – filed a petition for bankruptcy on Yukos in 2006, over $482 million in outstanding loans.[73] Though the Western banks had filed the bankruptcy petition, it was Rosneft – and the Kremlin – that was in the driving seat. The London lawyer representing the interests of the beleaguered Menatep Group, Tim Osborne, said he believed the Western banks were acting at Rosneft’s behest.[74] Sure enough, three days after they filed the suit, Rosneft bought out the Western banks’ outstanding debt.[75]
When the time came for the gavel to fall on Yukos’s remaining assets, another Western banking consortium provided Rosneft with a record-setting $22 billion loan,[76] while three Western energy majors provided legitimacy for the process, despite Menatep’s protests that the sales constituted outright theft. At the first bankruptcy sale, for a 9.4 per cent stake Yukos had wound up owning in Rosneft, TNK-BP, the Russian energy venture half owned by BP, bowed out after just ten minutes to allow Rosneft to make the winning bid.[77] Then, when Yukos’s gas assets were up for sale, the Italian energy majors Eni and Enel made the winning bid of $5.6 billion, then promptly handed control of the assets to Gazprom as part of a broader deal they’d struck with the state gas giant.[78] In both cases, the foreign participants were seen by market analysts to be seeking the Kremlin’s favour at a time when, in order to gain a toehold in the Russian energy sector, it was crucial to win the state’s backing. ‘The Kremlin would like to have the likes of Eni and BP participating because they want to show that despite the damage of Yukos … the reality is international oil companies are queuing up to enter the Russian energy sector,’ said Chris Weafer, then chief strategist at Russia’s Alfa Bank.[79]
By the end of the Yukos break-up, the state had taken control of 55 per cent of the nation’s oil output, a huge turnaround from the 80 per cent in private hands when Putin came to power.[80] Some Western lawyers and bankers had privately struggled to justify assisting the Kremlin in a campaign that had provided such riches. ‘Khodorkovsky was extremely aggressive on the tax front,’ said Frank Kujilaars, who then headed global oil and gas at ABN Amro, the now defunct Dutch bank which led the financing for Rosneft’s takeover of Yukos. ‘He was trying to maximise the returns in terms of using every loophole. It wasn’t illegal, but it was very much on the edge.’[81]
*
While Western lawyers and bankers lined their pockets in the Kremlin’s Yukos takeover, the reality Khodorkovsky was dealing with was far grimmer. Almost every day for eleven months he’d been taken in handcuffs to the same Moscow courtroom, forced to sit through hours of evidence as the Kremlin, intent on demonstrating the legitimacy of its case against him, laid out its accusations. But the allegations were deeply flawed – as even the foreign bankers who assisted the Kremlin in its expropriation seemed to acknowledge. One set of charges related to Khodorkovsky’s 1994 privatisation of Apatit, a large fertiliser plant in Russia’s far north, as well as a research institute attached to it that he acquired the following year – they were the first big privatisations Khodorkovsky’s Menatep Group had participated in. While Khodorkovsky’s defence lawyers argued that these charges had no basis in fact or law, they related to events that were rapidly reaching the end of a ten-year statute of limitations. The second set of charges related to Yukos’s use of tax shelters inside Russia in 1999 and 2000, which the prosecution alleged was illegal. But the same schemes had been widely used by other oil majors, and were in line with the Russian laws of the time. Khodorkovsky was being targeted retroactively and selectively, his lawyers said.
When Khodorkovsky was finally allowed to present his case in closing arguments, he launched into a tirade as he detailed each charge one by one. There was ‘not a single document – let me emphasise – not a single one – that would point to my illicit activities’, he said. ‘Two years of inhuman labours by the Prosecutor General’s office – and a zero result!’
The whole case, he claimed, had been launched as a show trial to provide cover for the expropriation of Yukos by state officials driven by greed: ‘The entire country knows why I was locked up in jail: so that I wouldn’t interfere with the plunder of Yukos. In doing so, the people who organised the persecution of me personally tried to frighten the authorities and society with my mythical political ambitions. When they say that the “Yukos case” has led to a strengthening of the role of the state in the economy, this evokes bitter laughter from me. Those people who are busily plundering Yukos’s assets today do not actually have anything to do with the Russian state and its interests. They are simply dirty, self-serving bureaucrats and nothing else.’
He ended his impassioned speech with a direct appeal to the judges’ sense of justice, arguing that surely such a ‘direct, barefaced deception’ of the court by the prosecutors could not pass: ‘I have faith that my country, Russia, will be a country of justice and law. And this is why the court must rule on the basis of justice and on the basis of the law.’[82]
But though the trio of judges appeared to listen intently, scribbling down notes as he spoke,[83] their verdict had already been determined. An eyewitness account has emerged that details for the first time how Sechin and one of his deputies had tightly controlled the process every step of the way.[84] To remove any doubt about how the judges would rule, the Kremlin had arranged for them to be put up in a sanatorium fifty kilometres outside Moscow, all expenses paid, while they wrote their verdict. In those days, the Kremlin could still not be completely sure of the judges’ loyalty, but this was the moment when the Russian court system fell under the Kremlin’s sway. The Kremlin had been anxious to ensure that Khodorkovsky’s business partners could not bribe the judges to rule in his favour. And at the sanatorium, security service agents could keep a close eye on them.
Sechin and his deputy in the presidential administration, a stern and pale-faced FSB general named Vladimir Kalanda, who happened to be married to the chief general counsel at Rosneft, had closely monitored the situation. When one of the judges refused to go to the sanatorium under police guard, Kalanda paid a visit to the chairwoman of the Moscow City Court, a doughty blonde named Olga Yegorova who’d climbed to the top of the court system since Soviet times, to make sure her subordinate complied.[85]
After a month at the sanatorium the three judges had still failed to finish writing the verdict, finding it difficult to complete more than a fraction of it in line with the Kremlin’s wishes. So Yegorova took on the task, telling a colleague to write it blindly, suspending all doubt. According to the eyewitness account, the colleague had told her the charges made no sense, but Yegorova had known exactly what the verdict should be from the start. ‘When I’ve made my mind up, I never change it,’ she told her colleague.[86]
The Moscow city court dismissed the eyewitness account as no more than ‘invention’ that did not require any comment. But when the verdict was finally read out in court, it differed little from the charges the prosecutors had presented, at times appearing as if it had simply been copied from the prosecutors’ case, with reams of witness testimony for the prosecutors cited verbatim. The judges dismissed the defence’s arguments one by one, apart from the charge related to the privatisation of the Apatit fertiliser plant, for which the statute of limitations had run out. ‘I have the impression that this is the same as the prosecution’s charges, just a little bit edited,’ said Khodorkovsky’s elderly father, shaking his head, after the first day of the delivery of the verdict.[87] ‘The judge has completely taken the side of the prosecution,’ one of Khodorkovsky’s lead lawyers said.[88]
The sentence the judges handed down after twelve long days of reading out the judgment in a rapid, monotone voice was severe. Khodorkovsky was sentenced to nine years in prison for the retroactive tax fraud charges, and one count of fraud related to the 1995 privatisation of the Apatit research institute for which the statute of limitations had not run out.[89]
Though the ruling had always seemed preordained, it still came as a shock. Sobs were heard across the courtroom as Khodorkovsky’s slight, blonde wife crossed her arms over her chest, struggling to hold herself together.[90] Khodorkovsky too went pale, as if he had not been expecting this, as if he’d thought the Kremlin machine might still exercise some leniency, or had even hoped that justice would somehow prevail. Though he remained slumped against the bars of the cage while the rest of the ruling was read out, he mustered the strength to register one last protest. When everyone began filing out of the courtroom, as if leaving him to his fate, he clambered on a bench to shout ‘This is lawlessness!’ to a reporter, even as armed guards tried to stop him. ‘There is no legal basis for this.’[91]
If Khodorkovsky still hoped for leniency, by the time his appeal came around just four months later, in September 2005, the Kremlin had tightened the screws even more. Sechin had piled the pressure on Yegorova to rush through the appeal, as the Kremlin was worried that the statute of limitations on the remaining fraud charge related to the privatisation of the Apatit research institute, which carried a maximum sentence of seven years, was about to run out. The other charges related to tax fraud carried sentences of only four, three, and one and a half years, and although there was one more fraud charge, with a seven-year sentence, related to the use of promissory notes in one of the tax schemes, the Kremlin – which in those days still worried about the appearance of due process – was concerned that it was far from solid.[92] The case against Khodorkovsky had to look legitimate, to strengthen Rosneft’s takeover of Yugansk. Yegorova had to issue the appeal verdict before the statute of limitations on the Apatit charge ran out, otherwise the Kremlin feared a challenge in the European Court of Human Rights.
Once the appeal trial started, Sechin called Yegorova to his Kremlin office every day – she went there so often the guards knew her by sight.[93] There, Sechin and one of his closest associates, Viktor Ivanov, the Kremlin head of personnel who’d closely watched over the Yukos case, anxiously needled Yegorova to make sure the verdict on the fraud charge was handed down on time. They feared that if the statute ran out they would have to reduce the sentence, and Khodorkovsky could be at liberty before the next presidential elections, scheduled for 2008. In that case, the entire Yukos takeover might be overturned. They’d been so taken aback by the events in Ukraine the previous year that they feared they could face their own Orange Revolution if Khodorkovsky was freed in time to organise a rebellion. ‘In three years,’ Sechin told Yegorova according to the witness account, ‘it will be a madhouse here. The prisoner needs to stay in jail.’[94]
Sechin’s nerves had been stretched to breaking point on the first day of the appeal, September 14, when none of Khodorkovsky’s defence team turned up. Khodorkovsky told the court the only lawyer authorised to defend him had been hospitalised, so Yegorova had no choice but to postpone the hearing till the following Monday, September 19. A furious Sechin called her in to the Kremlin and ordered her to begin the trial without the defence. When Yegorova dug her heels in, they called her in for a second time, and Ivanov and the deputy prosecutor general piled the pressure on her to speed things up. A rumour was going around Moscow that Yegorova had taken a $1 billion bribe from Khodorkovsky’s partners in Menatep to delay the hearing and make the sentence go away.
It was the rumours and the whispers that did the trick. Yegorova couldn’t bear the thought that the Kremlin thought she was corrupt. Though she continued to insist on Khodorkovsky’s right to a defence, she told Sechin and the Kremlin chief of staff, Putin’s ally Dmitry Medvedev, that she was going to hand down a sentence of eight years – a one-year reduction – no matter what happened. ‘I’ll take the entire responsibility for this on myself,’ she said. ‘And if I somehow disappoint you, I’ll resign. I’m sick of this.’[95]
The proceedings continued amid further tension and delays over the absence of Khodorkovsky’s main lawyer, Genrikh Padva, with the pressure on Yegorova mounting as whispers continued that she had taken a bribe. ‘Let them arrest me,’ she’d retorted. ‘Let them do what they want. I’ve never been so offended … so that you don’t think I took anything, it will be eight years,’ she told Sechin and Medvedev. When at the very last minute Khodorkovsky agreed to replace Padva with another lawyer who’d been working on the case, the hearing was rammed through in the space of a single day, September 22, to make sure the statute of limitations did not run out.
Khodorkovsky’s defence team repeatedly protested during the hearing at the speed with which it was proceeding. ‘What we’re dealing with here is not the prosecutors or the judges, it is the full weight of the state machine,’ said his main lawyer.[96] ‘The political authorities are dictating what’s going on here.’ The record of the initial trial had stretched to six hundred pages, and the defence complained that they hadn’t been given sufficient time to study it. But the judges ploughed relentlessly on. When Khodorkovsky made a closing speech in his defence, they tried to close him down after an hour. ‘We have all the documents. We’re actually ready to give the ruling,’ one of them said.[97] It was already 7.20 p.m., well past the hour when the court usually closed for the day. Though the judges let Khodorkovsky continue for another hour, it didn’t matter what he said. They’d already decided. They were only out of the courtroom for a matter of minutes before returning to deliver their verdict: eight years – exactly as Yegorova had promised. It was 9 p.m. on September 22. The statute of limitations on the fraud had not yet expired.
Khodorkovsky and his business partner Platon Lebedev were to be sent to as-yet undisclosed prison camps. Pale and exhausted, this time Khodorkovsky had no parting shot as he was led out of the court. His parents, Boris and Marina, waved to him with tear-filled eyes. Just over three weeks later he was transported in a windowless railway carriage across the Russian steppe to the end of the earth, a prison camp in the bleak uranium-mining town of Krasnokamensk in the far-east region of Chita, where almost two centuries before the political prisoners of the tsarist age, the Decembrists, had been sent.[98]
*
It was the trial that changed everything in Putin’s Russia. The pressure Sechin had brought to bear on the judges, the speed of the appeal process, the lack of substance to the charges, had brought the court system irrevocably under the siloviki. If, previously, the judges’ pitifully low wages had left them open to bribery by powerful oligarchs, now the Kremlin was taking over. ‘This was a matter of state,’ Putin told Yegorova when he greeted her in the Kremlin after the trial to thank her for the work she’d done, according to the eyewitness account.[99] He defended the haste with which Khodorkovsky was put behind bars by explaining: ‘Foreign capital has been ruling the country, that’s why there has been all this chaos.’ Putin and the Kremlin justified their power grab by painting Khodorkovsky and his allies as agents for the West. Khodorkovsky’s men had lined up $10 billion to interfere in the process, he told her. No one would ever check this claim. It was just part of the elaborate system of lies that was being constructed.
Putin’s Kremlin moved swiftly to stamp its control. This was the beginning of what was to become widely known as ruchnoye upravleniye, or the manual regime, in which the mechanics of every process were to be tightly controlled by the Kremlin’s men. Putin had always insisted that the Yukos court case had nothing to do with him or the Kremlin. But from the start every decision, every move, had been closely overseen. The takeover of the court system had begun with accusations and whispers that judges were taking bribes from the Kremlin’s opponents. The judges would seek to counter such allegations and display their loyalty by producing verdicts exactly in line with the Kremlin’s orders, in a pattern that harked back to Soviet times, when colleagues had spied and reported on each other, when everyone was under suspicion and closely watched.
That paranoia had never really gone away. And now the country was falling back into the times when everyone was divided between ‘us and them’, when there were fears of an outside enemy working to corrupt the system. But, in a new twist, the judges would now be tainted by the Kremlin instead. The husband of one judge, for instance, was picked up by the security services outside his home on his birthday, driven to a Subaru salesroom and told to choose a vehicle for himself.[100] Everyone knew the car was above his pay grade. Everyone knew what his wife did for a living, and which high-profile case she had just overseen. Everyone would assume it was a bribe, no matter how much the husband protested that he had had no choice. By such means were people tainted, tied to the Kremlin and kept under control. As time passed and the Putin regime further cemented its power, the size of these ‘gifts’ grew dramatically.
For Yegorova, married to an FSB officer who became a general, the trial was also a turning point. She became known as the ‘Iron Lady’ of the Russian legal system, the chairwoman who established a rigorous hold over the courts, threatening judges with loss of their jobs and housing if they failed to toe the line.[101]
The country was turning back to the times of the gulag. The Soviet system of ‘telephone law’ was being restored. The Kremlin had taken control of the legal system. The power of the secret services was being cemented. Khodorkovsky, the country’s one-time richest man, was languishing in a prison camp in Krasnokamensk. And the West had been complicit in the process.