The New Tsar (50 page)

Putin approved the deal to merge Gazprom and Rosneft in September 2004, the day after he announced the sweeping political changes in the wake of Beslan. It fit a pattern of centralizing control, a steady gathering of more and more power into Putin’s hands. The merger proposal, though, delighted investors and analysts, especially foreigners, the same ones who had been so shaken by the tumult in the market as the Yukos case unfolded. The reason was not complicated: there was money
to be made. As part of the merger, Putin promised that once the state controlled a majority share of Gazprom, he would lift the restrictions on foreign investors buying minority shares. Although Gazprom was seen as an unwieldy, inefficient behemoth, its monopoly power to sell natural gas and the Kremlin’s doting patronage created the prospect of returns enormous enough to tempt even the most jaded investor. Few seemed troubled by Yukos’s fate anymore. By some estimates, foreign investment would double Gazprom’s market capitalization, with the rising value benefiting thousands of shareholders. A month after the merger was announced, John Browne of BP heaped praise on the direction in which Putin had taken Russia, brushing aside the trepidations many inside and outside the country had about the Kremlin’s tactics. “Since Gorbachev a lot has happened in Russia,” he said. “No country has come so far in such a short space of time.” As for Yukos, he dismissed the prosecutorial assault on Khodorkovsky and his partners as an isolated matter “related to a person, place and a time,” not to the country’s economic future.
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Putin announced that the merger would be completed by the end of the year, and it became clear that he wanted the new company to bid for Yuganskneftegaz. When the auction and opening price were announced at the end of 2004, he turned to Germany’s chancellor, Gerhard Schröder, to help arrange the as much as $10 billion in financing that would be required for the purchase.
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The bank that led the consortium was Dresdner, whose managing director in Russia was Matthias Warnig, the former Stasi agent who had befriended Putin in the early 1990s and remained a liaison in the many deals being hashed out between German and Russian companies.

Gazprom, with another Putin aide, Aleksei Miller, serving as chief executive, did not seem as enthusiastic. The company remained skeptical about absorbing Yuganskneftegaz on top of merging with Rosneft; it was already struggling with debt and the looming expenses needed to modernize.
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Igor Sechin, on the other side, had his own ideas about creating the energy giant that Putin favored. That July Putin had appointed him the chairman of Rosneft, then the country’s fifth largest oil company, and now Sechin had grand visions to make it, not Gazprom, the country’s leading energy company. That meant keeping it from being swallowed by Gazprom and acquiring Yukos’s besieged assets for Rosneft alone. As soon as the merger was announced in September, Sechin and Rosneft’s chief executive, Sergei Bogdanchikov, worked behind the
scenes to scuttle it, and that is exactly what they managed to do, though not in the way anyone expected.
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Meanwhile, Yukos’s shareholders and managers, many of whom were now safely abroad, had not yet given up their fight to block the auction and somehow preserve the company. Knowing they had little hope in the Russian courts, their lawyers filed for bankruptcy in faraway Texas six days before the auction of Yuganskneftegaz. It was an act of desperation, with only shaky legal grounds for a Russian company with little connection to Texas, but the next day a judge issued a temporary restraining order intended to block the auction until she considered the merits of the filing. The order could not stop the Russian government from proceeding, but it did affect the foreign banks lining up the loans for the auction. Like the ruling by Ukraine’s Supreme Court barely two weeks before, the restraining order upset Putin’s carefully calculated plans, and he reacted angrily, mocking the judge (“I am not sure this court even knows where Russia is,” he said) and fuming at the audacity of an American court interfering in what he considered to be the internal business of the Russian state. To make his point, he cited, in Latin, the core principle of state sovereignty from ancient Roman law:
par in parem non habet imperium
, an equal has no authority over an equal. Putin’s outburst betrayed a sense of grievance and anger that he had mostly kept in check on issues outside of Chechnya; now he was lashing out.

The judge in Texas ultimately dimissed the filing on jurisdictional grounds, but by then her order had had its intended effect. Fearing legal liability in the United States, the international bankers withdrew the financing they had lined up for Gazprom to buy Yukos’s assets through a new company created in anticipation of the merger, called Gazprom Neft, which was then still just an empty structure. To protect itself, Gazprom officially divested itself from the new firm, but this shell company pressed ahead anyway when the auction took place that Sunday, even though it no longer had any cash to use for the purchase. At the auction, two officials from Gazprom Neft sat at one table, while at another table sat a man and a woman few people knew. They did not identify themselves, but they represented a company called Baikal Finance Group. The woman turned out to be Valentina Davletgaryeva, who had registered the company thirteen days before in Tver, a city southeast of Moscow. She listed its address as an old hotel that now housed a mobile phone shop and declared its capital at the equivalent of $359. (Three
days before the auction, the company submitted a deposit of $1.7 billion.)

The auction itself was theatrical. The auctioneer wore a tuxedo with tails and a bow tie; wielding a gavel, he invited the first bid. Davletgaryeva’s companion, Igor Minibayev, raised his hand and offered $9.37 billion. Gazprom Neft’s representative asked for a recess and promptly left the room to take a phone call. When he returned, he said nothing, and the auctioneer brought the hammer down. The whole thing lasted ten minutes.
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No one outside Putin’s Kremlin knew who now owned Yukos’s crown jewel, not even the head of the property fund who had just sold it. The auction recalled the murky privatizations of the 1990s; for all Putin’s promises to the contrary, the state was resorting to the same tactics to divvy up property on the cheap, this time having seized it back from private hands. One of the sharpest critiques of the auction came from Stanislav Belkovsky, who only a year before had been one of the political strategists warning the Kremlin of an “oligarchic coup.” Now he said the auction of Yuganskneftegaz was “just a deal for the redistribution of property by a criminal group with a mission to get control over the basic financial flows of the country, just as in the 1990s.” He called Putin “the chief of this criminal group.”
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Even more surprising was a rebuke from within Putin’s administration. Andrei Illarionov, the Kremlin’s economic adviser, described the sale as a disturbing turning point for Russia, though he was careful to avoid criticizing the president personally. “For the past thirteen years Russia was seeking to return to the first world, to which it belonged until the Bolshevik Revolution. Now we see it has preferred the third world,” he said at a press conference. “We have passed the crossroads—we are in a different country.”
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He was promptly demoted from his job preparing for the G8 meeting to be held in Scotland the following June.

For a couple of days afterward the fate of Yuganskneftegaz became a parlor game in Moscow. Many analysts assumed, wrongly, that Baikal Finance was a front to protect the ultimate buyer, Gazprom. Putin, in Germany for a state visit with Gerhard Schröder, spoke coyly two days after the auction, giving away nothing, though he acknowledged that he knew the company had been hastily created to help deflect the potential liability from the lawsuits swirling around Yukos.
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“As is well known, the shareholders of this company are all private individuals, but they are individuals who have been involved in business in the energy sphere for
many years,” he said when asked about the mysterious buyers. “They intend, as far as I am informed, to establish relations with other energy companies in Russia which have an interest in their company.” He was dissembling. The day before, Rosneft had sought and, with Putin’s blessing, received authorization from Russia’s anti-monopoly committee to purchase Baikal Finance Group. Rosneft, which only weeks before had seemed destined for absorption into Gazprom, now owned a vastly undervalued subsidiary able to pump a million barrels of oil a day.

On December 23, four days after the auction, Rosneft announced its purchase. It would take another year to untangle the complicated financing involved. The mysterious and short-lived Baikal Finance had received the advance for the auction from another oil company with close relations to Putin and the Kremlin, Surgutneftegaz; it was repaid once Rosneft acquired the auctioned asset, which even at its discounted price was worth more than Rosneft itself. Rosneft, in turn, struck a deal with China’s state oil company, CNPC, to put up the cash as prepayment for the oil that Rosneft stood to derive from Yukos’s seized assets.
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The irony was that Mikhail Khodorkovsky had long advocated developing a strategic partnership with China, even building a pipeline to the country, only to be blocked by the Kremlin, which remained wary of the rising economic power of Beijing. Now Rosneft, with Igor Sechin on its board, had effectively acquired Yukos’s confiscated asset for nothing except the promise to pay that asset’s future profits to China. It was, as Andrei Illarionov called it, “the swindle of the year.”

Facing a new storm of international criticism, Putin defended the auction with a swaggering confidence, calculating that the initial furor over Yukos would dissipate and that no one could do anything about it anyway. At his annual press conference that December, he smugly brushed aside questions with coy elisions and evasions. “Now regarding the acquisition by Rosneft of the well-known asset of the company—I do not remember its exact name—is it Baikal Investment Company? Essentially, Rosneft, a 100 percent state-owned company, has bought the well-known asset Yuganskneftegaz. That is the story. In my view, everything was done according to the best market rules. As I have said, I think it was at a press conference in Germany, a state-owned company or, rather companies, with 100 percent state capital, just as any other market players, have the right to do so and, as it emerged, exercised it.” He lamented again the 1990s, when oligarchs “using all sorts of stratagems” managed to amass state assets “worth many billions.” It was different now,
he went on. “Today, the state, resorting to absolutely legal market mechanisms, is looking after its own interests.” The last statement was widely quoted in the media, but the ultimate significance of it was little noticed at the time. Eventually, it would come to haunt Putin and cost Russia billions.
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M
ikhail Khodorkovsky’s trial dragged on for another five months, as prosecutors read through copious financial records and questioned witnesses. The evidence was scant and contradictory, and in some cases clearly fabricated. It did not matter; the outcome by now was preordained. The court repeatedly rejected the defense’s motions, refused to allow subpoenas, and restricted its questioning. On April 11, Khodorkovsky stood before the court and made a final statement.
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He declared his innocence and for thirty-nine minutes spoke passionately, defiantly, righteously. He called himself a patriot of Russia who was prosecuted not for any real criminal offenses but for being the “wrong kind of oligarch.” Unlike the “modest businessmen” and government officials behind the Yukos affair, bureaucrats with lifestyles incommensurate with their official salaries, he said, “I have no yachts, no palaces, race cars, or football clubs.” The destruction of Yukos “was contrived by certain influential people with the aim of taking for themselves the most prosperous oil company of Russia, or more precisely, the revenues from its financial flows.” He suggested that Putin had been deceived into believing Khodorkovsky posed a political threat whose removal was necessary to protect the state’s interests. “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. The entire country knows why I was locked up in jail: so that I wouldn’t interfere with the plunder of the company.” The “court of history” would vindicate him, he said. He finished by thanking those who had supported him, especially his wife, who stood by him courageously, “like a real Decembrist’s wife.”

Once the final verdict was read in full over two weeks in May, the historical allusion seemed apt. With his partner, Platon Lebedev, he was convicted and sentenced to nine years in prison, and like the military officers who rose up against Tsar Nicholas I in 1825, he was banished to Siberia, to a penal colony in Chita, a region bordering China and Mongolia, even though the law required prisoners to be incarcerated in the region where they committed their crimes. A few days after he arrived,
his business partners paid for a full-page advertisement in
The Financial Times
with a defiant letter from Khodorkovsky. “They hope Khodorkovsky will be soon forgotten,” it declared. “They are trying to convince you, my friends, that the fight is over, that we must resign ourselves to the supremacy of self-serving bureaucrats. That’s not true—the fight is just beginning.”
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