The Oligarchs

Leonid Gozman, the head of a small progressive political party with ties to the Kremlin, said, “This is shocking. It was obviously a political, not a judicial decision.”¹ Earlier, a U.S. diplomat who was monitoring the trial had written in a cable to Washington that the “motivation is clearly political.” By holding a trial, the diplomat added, the Russian government was “applying a superficial rule-of-law gloss to a cynical system where political enemies are eliminated with impunity.” The cable was titled, “Rule of Law Lipstick on a Political Pig.”²

Khodorkovsky was taken out of the glass box and returned to prison. It seemed that Putin had succeeded in locking him up and throwing away the key.

But then something unusual happened. On February 14, an Internet news portal based in Moscow, Gazeta.ru, and an online video channel, Dozhd TV, carried an interview with Danilkin’s assistant, Natalia Vasilyeva, who was also the court press secretary. She said that the judge had started to write his own verdict, but instead was forced to deliver a different one, given to him by higher authorities. “I know for a fact the verdict was brought from the Moscow City Court,” which oversees Danilkin’s court, she said. “Of this I am sure.” The judge was “sort of a bit ashamed of the fact that what he was reading out was not his own, and so he was in a rush to be rid of it.” She added, “I can tell you that the entire judicial community understands very well that this case has been ordered, that this trial has been ordered.”³

The whole spectacle offered a revealing glimpse of the system Putin created to rule Russia. On the surface, all the outward trappings of a market democracy could be found: courts, laws, and trials; stock exchanges, companies, and private property; newspapers, television, radio, and Internet news outlets; candidates, elections, and political parties; and even a few gutsy people to hold up protest signs or whisper truths about the judge. But the real power was in the hands of Putin and his cronies. Their control was not absolute—it was a soft authoritarianism—but when they decided to go after someone, as they did with Khodorkovsky, they got their way.

When The Oligarchs was written a decade ago, the architects of the new Russia hoped that freedom and competition would drive politics and capitalism. President Boris Yeltsin’s reforms gave rise to a people more free and entrepreneurial than any in Russian history. Millions went abroad for the first time, voted in elections, enjoyed a free press, and learned to rely on themselves rather than the state. Anatoly Chubais, who transferred a vast treasure of state-owned factories, mines, and oil fields to private hands, expressed confidence that the new owners, even the greediest tycoons, would be more effective than the old Soviet bosses, simply because they would be forced to compete in a free market that would determine winners and losers.

But Yeltsin and his team did not complete the journey they began. Zealous destroyers of the old, they stumbled when it came to erecting the new institutions that Russia desperately needed. Although Yeltsin instinctively understood freedom, he did not grasp the importance of building civil society, the all-important web of connections between the rulers and the ruled. Even more troublesome, Yeltsin fell short in establishing the rule of law to govern the freedoms he unleashed. The result was a warped protocapitalism in which a few hustlers became billionaires and masters of the state. This was the age of the oligarchs, and their story is at the heart of this book.

When Putin took office in 2000, the central problem he faced was what to do with this inheritance. There was no going back to the Soviet Union. But what would follow the tumultuous Yeltsin years? Putin came to the task with little understanding of either Mikhail Gorbachev’s perestroika or Yeltsin’s roaring nineties. Putin, a former KGB agent and backroom operator, had never stood for a competitive election, and he disdained the tycoons. Over the next eight years, he chose a path that was autocratic and statist. He brought to power like-minded men who, loosely, formed their own clan. Called siloviki, or the men of the security services, they shared Putin’s penchant for control and hoped to enrich themselves in the process.

Putin, in his first year in office, forced out Vladimir Gusinsky, the media magnate, and soon after, Boris Berezovsky, both prominent oligarchs of the 1990s. Putin spoke of brandishing a club to make the tycoons heel and vowed there would be no such thing as oligarchs as a class. “This is how I see it,” he said. “The state holds a club, which it uses only once. And the blow connects with the head. We have not used the club yet. We have only shown it, and the gesture sufficed to get everyone’s attention. If we get angry, however, we will use the club without hesitation.”⁴ Putin told the remaining oligarchs from Yeltsin’s day that they could keep their assets, but that he would brook no challenge. They fell into line. Unlike Yeltsin in the freewheeling nineties, Putin preferred a system of state or crony capitalism in which the powers-that-be would choose the winners and losers.

After Khodorkovsky’s arrest in 2003, his oil company, Yukos, was driven into bankruptcy and stripped of its valuable assets by the Russian authorities. A windfall—the prized oil production subsidiaries—went to the state-owned oil company Rosneft. In 2006, Rosneft held an initial public offering in which it raised more than $10 billion, the largest such share auction ever in Russia. The chairman of Rosneft then was Igor Sechin, a deputy prime minister and longtime Putin crony. As the transaction suggests, the siloviki did not break the iron bond between wealth and power that had been forged under Yeltsin and the oligarchs; rather, they took it over. Dmitri Trenin of the Carnegie Moscow Center concluded, “Private and corporate interests are behind most of Moscow’s major policy decisions, as Russia is ruled by people who largely own it.” Under Putin, he said, the government had been turned into Russia Inc., “with top Kremlin staffers and senior ministers sitting on the boards of various state-owned corporations and taking an active interest in their progress and profits.”⁵ While the first generation of oligarchs was arrogant and fairly conspicuous, the new breed under Putin was quiet and secretive.⁶

Putin promised to end the lawlessness of the previous decade. He did fill in important gaps in legislation, notably with a new tax code. Putin also bestowed new powers and resources on the Federal Security Service, known as the FSB, the domestic successor to the KGB. However, revising laws on the books and adding more law enforcement officers did not seem to create more rule of law. In fact, by some measures the government bureaucracy expanded and corruption became much worse. The Khodorkovsky case was a signal to all those in power, not only in Moscow but down through the regions, that they could exercise their whims with impunity. A tragic example came in a case involving William Browder, who at one point was the largest private equity investor in Russia. Browder’s method was to buy shares in a company, dig into its books, then publicize whatever corruption and stealing he discovered, hoping to drive the stock price higher and enrich his fund. At first, Browder thought Putin would clean up corruption and be good for the country. But then Browder, too, became a target, perhaps because his aggressive tactics rubbed entrenched bosses the wrong way. On November 13, 2005, he was stopped at the Moscow airport after a business trip and refused reentry into Russia. In early 2007, a group of Interior Ministry officers raided the offices of Browder’s fund, Hermitage, and its lawyer’s offices. They seized corporate seals and charters, then used them to finagle a $230 million tax refund from the Russian government, a breathtaking gambit by men who were supposed to be the police. When Browder complained loudly about the corruption, one of his Moscow lawyers, Sergei Magnitsky, thirty-seven, was arrested and held without bail. Magnitsky became ill in prison, but his appeals for medical treatment were ignored, and he died in jail in late 2009. The case cast a harsh light on the culture of impunity; no one was ever arrested for Magnitsky’s death. “Russia is being criminalized at an exponential rate,” Browder lamented. “I wish I had not gone there.”⁷

In a cable sent on February 12, 2010, from the U.S. embassy in Moscow, later published by WikiLeaks, corruption in Russia was described as pervasive, reaching from café owners who pay bribes for protection, to governors who extract bribes as a kind of tax system, to law enforcement agencies that maintain formal channels for payments. The cable quoted one person suggesting that cash was sometimes carried into the Kremlin in suitcases. Another disagreed, arguing that this method was unnecessary—“it would be easier to open a secret account in Cyprus.”⁸ The group Transparency International, in an annual index of corruption perceptions, ranked Russia at 154 out of 178 nations, on a par with Kenya and Tajikistan.⁹

As in Yeltsin’s years, disputes were sometimes settled by hired assassins. Anna Politkovskaya, a crusading reporter who had written trenchant pieces about the unsolved murders and violence in Chechnya, was gunned down on October 7, 2006, in the elevator of her Moscow apartment block. Putin vowed to find the killer and said the crime “must not go unpunished.” Three men were charged, but then acquitted at trial. No one was punished in the end.

After a series of apartment house bombings in Moscow and other cities in 1999, Putin successfully portrayed himself as a tough guy. People were desperate for order and calm. Putin had enough support that he could have created a law enforcement and judicial system that was independent and respected, but he did not want to. Instead, he put the siloviki first. The secret services were given expanded authority to carry out operations abroad—including assassinations—and to suppress political dissent at home. The director of the FSB called these security men “the new nobility.” For all their privileges, however, in the years that followed they faced sharp criticism for failing to prevent a wave of terrorist attacks, including the Nord-Ost siege in October 2002. When Chechen terrorists seized a Moscow theater full of civilians, the security services pumped a disabling gas into the building. All of the terrorists were killed in the ensuing assault, but 130 of the hostages also died, many because they were not promptly treated for exposure to gas. Then, in September 2004, at least 339 people died in a violent standoff with militants in a school in Beslan, Ingushetia, near Chechnya. Over half of the victims were children. Again questions were raised: where were the siloviki?¹⁰

Putin exploited the Beslan attack to turn the screws tighter in his control of the political system. In his first term, Kremlin aides described their approach as “managed democracy,” in which the institutions such as political parties were allowed to carry on, albeit with sharply limited autonomy. In these years, Putin took control over all the major independent broadcast television networks, established unrivaled dominance of both houses of parliament, and forced the oligarchs to submit. But in the weeks after the Beslan bloodshed, Putin changed the political structure permanently. He eliminated election of regional governors, who would henceforth be appointed by himself. He also changed voting for the State Duma, the lower house of parliament, so that the only choice would be political parties, not candidates from individual districts. Such a party-only system is used elsewhere in the world, but in Russia it had the impact of wiping out many of the remaining independent lawmakers, elected from districts. In the December 2003 parliamentary elections, two smaller progressive parties, Yabloko and the Union of Right Forces, failed to win any seats as parties. Of the four parties that did win seats, all were supportive of the Kremlin.

In his second term, Putin imposed still more autocracy and centralization. The powerful Central Election Commission was put under the control of a longtime associate of the president, Vladimir Churov, who said upon taking office that his “first law” was that “Putin is always right.” The Kremlin oversaw how money was distributed to candidates in elections and put a chokehold on the national television news so that opposition voices were permitted only brief appearances, if any. The spicy political satire of the 1990s, which often skewered Yeltsin and his team, was largely silenced.¹¹

Putin’s authoritarianism was not absolute; he often used manipulation rather than outright repression to get his way. Many of the truly independent media outlets—including newspapers, magazines, radio, and the Internet—were permitted to continue working, sometimes publishing and broadcasting hard-hitting material about the government. The Internet was not blocked, so Russians could freely see all kinds of opinions there, including some that were harshly critical of the regime. But the audience for the independent media, concentrated in Moscow and other big cities, was relatively small, and the journalism had little real impact. The Kremlin and the major television outlets simply ignored any nettlesome questions. For example, Russia’s finance minister, Alexei Kudrin, spoke out in February 2011 at a conference about the failure to build a rule of law. “Rather than abiding by the rules,” he said, “we live as we please and rely on winks and nudges. We have a very weak system of governance.” This serious critique of the ruling powers was ignored by the leading television stations. ¹²

Without real political choices, many people in Russia simply checked out. Masha Lipman, editor of Pro et Contra, a journal published by the Moscow Center of the Carnegie Endowment for International Peace, said that Russians had become alienated from politics and had entered a kind of “no participation pact” with Putin: They wouldn’t meddle in politics, if he would stay out of their personal lives. In Soviet times, Lipman recalled, the state intruded everywhere, but in Russia today people enjoy “virtually unlimited individual freedoms.”

“People eagerly engage in their private affairs with little regard for the political realm, which they have willingly abandoned,” she added. The result is that “the government enjoys easy dominance over society.”¹³

After the crash of 1998, when the government defaulted on its debts and devalued the ruble, Russia benefited enormously from an extended economic boom. Growth averaged more than 7 percent per year between 1999 and 2008, making Russia’s one of the fastestgrowing economies in the world. (Russia also suffered a sharp decline, an 8 percent drop, in the crisis of 2008.) By most accounts, the long run of high oil prices gave Russia a robust budget and finances in these years, but it postponed much-needed reforms. The country is still heavily dependent on oil, gas, and other natural resource exports.¹⁴ In the annual ranking of the world’s billionaires, Forbes magazine says that there are 101 of them in Russia, largely in oil, gas, coal, metals, and banking. Andrei Melnichenko, who in 1991 was a currency trader working out of his dorm room at Moscow State University, is now the seventeenth-richest billionaire in Russia, the magazine says, with $8.6 billion.¹⁵

Just as Putin was handpicked by Yeltsin, so too did Putin choose his own successor as president, Dmitri Medvedev, an associate from St. Petersburg who was elected according to the familiar pattern of “managed democracy”—the balloting was held, but the outcome was preordained. Putin became prime minister and by most accounts has continued to pull the levers of power, although the relationship between the two remains opaque and open to debate. Lilia Shevtsova, the astute political analyst in Moscow, said that while Putin is dominant in the tandem, Medvedev plays the important role of assuaging liberals and the West. In September 2009, Medvedev published a lengthy essay titled “Russia Forward” in which he described a list of Russia’s woes: overreliance on natural resource exports, decrepit infrastructure, corruption, and a weak civil society. Medvedev called for modernization and diversification of the economy. Earlier, he also pledged to end the “legal nihilism” of recent years. But it appeared to be more talk than action. The Khodorkovsky trial unfolded on his watch. Medvedev has coaxed Russian and foreign investors to contribute to a kind of high-tech center to be built at Skolkovo outside of Moscow, but Silicon Valley was not built in a day, and Medvedev’s project seems more a symbol than a real force for change.

In early 2011, Medvedev remarked that a nation cannot “be held together by tightened screws.” Putin tried to hold Russia together for eight years with tightened screws, but this is hardly a viable path for the years ahead. Russia still desperately needs to modernize and to attract foreign capital, challenges that will be impossible to meet without also building the rule of law. It is becoming ever clearer that economic modernization cannot succeed without political modernization too. Russia has yet to fulfill the hopes of Yeltsin’s reformers, who dreamed of a free market democracy driven by vibrant competition. Perhaps it may take generations. Certainly, the age of the oligarchs described in this book did not fully realize the dream, nor did the decade of Putin authoritarianism. But it remains a dream worth pursuing, and fighting for.

3 Khodorkovsky & Lebedev Center, “Court Aide Reveals the Verdict Was Forced on the Judge,” March 2011, available at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/March2011Newsletter.html (in Russian, see http://www.gazeta.ru/politics/2011/02/14_a_3524202.shtml). Also, on April 14, 2011, a former court official, Igor Kravchenko, said in an interview with the newspaper Novaya Gazeta that the judge in the case had acknowledged that the verdict would be dictated to him by superiors.

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