The oligarchs, p.1
The Oligarchs, page 1
Table of Contents
Praise
Title Page
Dedication
The Oligarchs
Prologue
PART ONE
Chapter 1 - Shadows and Shortages
Chapter 2 - Alexander Smolensky
Chapter 3 - Yuri Luzhkov
Chapter 4 - Anatoly Chubais
Chapter 5 - Mikhail Khodorkovsky
Chapter 6 - Boris Berezovsky
Chapter 7 - Vladimir Gusinsky
PART TWO
Chapter 8 - Unlocking the Treasure
Chapter 9 - Easy Money
Chapter 10 - The Man Who Rebuilt Moscow
Chapter 11 - The Club on Sparrow Hills
Chapter 12 - The Embrace of Wealth and Power
Chapter 13 - Saving Boris Yeltsin
Chapter 14 - The Bankers’ War
Chapter 15 - Roar of the Dragons
Chapter 16 - Hardball and Silver Bullets
Epilogue
Afterword to the 2003 Paperback Edition
Postscript
Notes
Bibliography
Acknowledgements
Index
Copyright Page
Praise for THE OLIGARCHS
“In terms of sheer drama, it’s an irresistible tale, and David Hoffman’s new book . . . milks it for all it’s worth . . . Many future readers will find themselves returning to Hoffman’s book to find out what, exactly, makes Russia tick.”
—Newsweek
“Hoffman brilliantly shows how seemingly halting and insignificant acts finally culminated in changes in a whole society.”
—Washington Post
“Hoffman makes the tale of the men’s rise and fall a masterful blend of adventure and serious, informed analysis.”
—Foreign Affairs
“[Hoffman] offers one the most wide-ranging and sober of several recent descriptions of the oligarchs during the painful past decade of change in Russia.”
—Financial Times
“Engagingly written . . . the most comprehensive and most fascinating account of the new Russia to date.”
—San Jose Mercury News
“This sad story comes to life in David Hoffman’s sprawling new book . . . for those interested in the future of this puzzled and puzzling country, Hoffman’s book could not have come at a better time.”
—Washington Monthly
“Hoffman’s masterly account of this period . . . dispels any doubts that [the oligarchs] did call the shots . . . Without their efforts the Russian people would still be languishing under a hopelessly ineffective command economy. That is one view. The other is that these men were self-serving opportunists who carried out the biggest heist in history . . . It is the success of Hoffman’s compelling story that we come away convinced of both versions.”
—The London Sunday Times
(Listed in 100 Best Books of the Year)
“Finally, a truly revelatory book about the men who remade Russia in the 1990s . . . experts will be astounded by Hoffman’s great reporting, but any curious reader will be intrigued by the stories of these men’s extraordinary lives.”
—Robert G. Kaiser
“David Hoffman has produced a monumental book . . . The Oligarchs may be the last book ever written on the subject since it is hard to imagine anyone else trying to replicate let alone improve upon the quality of research, analysis, and prose contained in this book.”
—Michael McFaul
To Carole
The Oligarchs
Ten Years Later An Introduction to the 2011 Paperback Edition
IN MOSCOW, outside the Khamovnichesky courthouse on the morning of December 27, 2010, a hundred or so people gathered on a snow-covered knoll, dressed against the bitter cold in heavy coats, some of them holding up protest signs bearing a photograph of a man with short-cropped, graying hair and rimless eyeglasses. “Together with the people, for a new Russia!” declared one placard. “To freedom !” said a large campaign-style button.
Inside the courtroom, the man in the photograph was standing inside a glass-covered steel cabinet, with a lock and chain on the door. He was Mikhail Khodorkovsky, one of the most ambitious of the first generation of oligarchs who rose to wealth and power after the collapse of the Soviet Union. The day before, at the end of a twenty-two-month trial, Judge Viktor Danilkin had found Khodorkovsky guilty of embezzlement. Khodorkovsky had already spent more than seven years in prison after an earlier trial and conviction of fraud. Now, as the judge, without looking up, read from the lengthy verdict, speaking rapidly and almost inaudibly, Khodorkovsky and his codefendant, Platon Lebedev, listened from inside the glass detention box.
Out on the street, Interior Ministry riot police seized anyone carrying a protest sign on the knoll and dragged them to a waiting bus. Some of the signs criticized Prime Minister Vladimir Putin, who had ruled Russia with an autocratic hand for a decade. Everyone who held up a sign was arrested. Several of those detained were old women. When one particularly frail woman was arrested, the crowd stirred, chanting “Shame!” and “Freedom!” Some of the protesters went right up to the officers and shouted in their faces. “Do your children know what you’re doing here?” said one. “Aren’t you ashamed of yourself?” demanded another. The riot police stood by impassively.
By 1:00 P.M., about twenty demonstrators had been taken away. The crowd thinned. Vadim Klyuvgant, one of Khodorkovsky’s lawyers, came out of the courtroom in a black suit without an overcoat. He said that the judge had not yet pronounced a sentence, but that what had already been read aloud indicated it would be severe. All of the prosecution’s charges had stuck, except those for which the statute of limitations had expired. Klyuvgant suggested that the judge was under “strong guidance” from the powers-that-be. He did not say precisely who. He added, “This is a disgrace.”
Two days later, on Thursday, December 31, Danilkin delivered the sentence: Khodorkovsky would have to serve another six years. Khodorkovsky’s mother, Marina, bitterly assailed the judge, “Damn you and your descendants!” Through his lawyers, Khodorkovsky released a statement: the verdict showed, he said, that “you cannot count on the courts to protect you from government officials in Russia.”
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.
