The New Tsar (51 page)

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T
he final acquisition of Yuganskneftegaz by Rosneft upended Putin’s plan to create a single energy giant. Gazprom had lost the financing to allow it to take over the asset and worried about the legal risks of doing so. Rosneft, though, had no exposed assets outside of Russia that could be at risk if it violated the Texas court’s ruling. Rosneft, now an oil giant on its own, worked assiduously to stay independent—that is, to avoid the merger with Gazprom. Putin ended up in the middle of an internal struggle over the state’s most important assets, pitting Medvedev and Miller at Gazprom on one side versus Igor Sechin and Rosneft on the other. The unseemly conflict spilled into public view in a way few others inside the Kremlin had, and it ended only in the spring of 2005, when Putin decided on a compromise that allowed each faction to keep control of its respective company.

The dismantling of Yukos may not have gone exactly according to plan, perhaps, but it had proved remarkably successful. Putin weathered the warnings from outside economists, and even insiders like Illarionov, that the Kremlin’s centralization of business would damage Russia’s standing as a reliable place for business and foreign investment. He simply repeated that the country welcomed and encouraged investment even as the organs of the state expanded even deeper into the economy. The Yukos affair did taint Russia’s reputation, sowing distrust and fear of the risks of investing in the country, but in the three years after the assault began, Russia’s stock market had more than tripled in value anyway; the economy continued its robust growth, its gross domestic product surging 6 or 7 percent a year on average. Over time, the consternation over Khodorkovsky’s fate—and that of Yukos—grew fainter and fainter. The potential riches Russia had to offer proved too irresistible to the world’s energy and financial giants—and so to Putin’s counterparts in foreign capitals. Despite their public remonstrations over the state of democracy or the rule of law, they could not afford to ignore Russia. Why should Putin worry if some questioned the state’s methods?

“Russia is a dynamically growing market with large capacity,” he told
a group of American and other foreign executives inside a marbled conference room at the resplendent Konstantin Palace in Petersburg in June 2005, less than a month after Khodorkovsky’s sentencing. “I am sure that we can provide investors, including yourselves, with good working conditions and impressive profits.” Putin sounded like Russia’s pitchman. Sanford Weill, the chairman of Citigroup, had conceived this meeting after a previous one with Putin in February. Among those attending were eleven of the most important chief executives in the United States, including Craig Barrett of Intel, Alain Belda of Alcoa, Samuel Palmisano of IBM, James Mulva of ConocoPhilips, and Rupert Murdoch of News Corporation. All had major investments in Russia and wanted more. Weill wanted Putin to clarify the “rules of the road” for investors,
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but instead Putin chided the men for various restrictions that the United States imposed on trade with Russia, including export controls on space, computer, and military technology and an amendment passed by Congress in 1974 in retaliation for the Soviet Union’s restriction of emigration by Jews to Israel. Russia had long since dismantled the barriers to emigration, but the United States in the 1990s never got around to taking off the books the trade sanctions it had opposed three decades before, even as president after president waived their use. “It would be funny, if it were not so sad,” Putin told them. He encouraged an expansion of trade but placed on these men the task of straightening out the rules back home first.

When the meeting concluded, the executives gathered around to greet Putin and to pose for photographs, all smiling. Weill at one point turned to Robert Kraft, the head of the Kraft Group and owner of the New England Patriots, which had won football’s Super Bowl in February. “Why don’t you show the president your ring?” he urged him. Kraft did not often wear his but carried it with him in his suit pocket. The ring was a gaudy bauble, studded with 124 diamonds and engraved with Kraft’s name. He handed it to Putin, who then slipped it on a finger. “I could kill somebody with this,” Putin said, admiringly. As the photo session ended, Kraft held out his hand for the ring, but Putin slipped it instead into his pocket, turned with his aides, and left. Putin apparently assumed the ring was intended as a gift, and Kraft was flustered by the misunderstanding. He appealed to Weill and later the White House for help retrieving the ring, but by then articles and photographs had appeared in the media, and an aide at the White House, fearful of the
growing strains with the Kremlin, explained that it would be best for relations if Kraft would say he had intended it as a gift. “I really didn’t,” Kraft explained. “I had an emotional tie to the ring. It has my name on it. I don’t want to see it on eBay.” The aide was silent for a moment and repeated, “It would
really
be in the best interest if you meant to give the ring as a present.”
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Kraft obliged with a statement four days after the meeting, saying the ring was a “symbol of the respect and admiration that I have for the Russian people and the leadership of President Putin.” It was a cost of doing business in Russia, but the misunderstanding gnawed at Kraft for years afterward. (“Of course, his forebears were probably raped and pillaged by these people,” his wife later said, referring to Kraft’s Jewish ancestry, “but Robert had to make it sound good.”)
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Kraft had another ring made, and the original went into the Kremlin library, where gifts to the head of state are collected.

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T
he Yukos affair did not, as some feared, augur the renationalization of all of Russia’s newly privatized industries, especially those tapping Russia’s natural resources, but it was a turning point—and a model for the steady encroachment of the state into the country’s important industries. Putin identified scores of enterprises that, by law, could not be held in private hands and then began overseeing the creation of giant state corporations that would consolidate entire sectors and thus command the nation’s economy. He put in charge of them the men he had brought with him from Petersburg, many of whom continued to serve as ministers in his government while carrying out their corporate responsibilities. Their corporate positions provided access to cash flows and the opportunity for patronage. In addition to Igor Sechin at Rosneft, suddenly Russia’s second largest oil producer and within a year the largest, Sergei Ivanov, then the defense minister, took over as chairman of United Aircraft Corporation, created to consolidate civilian and military aircraft manufacturers. Vladimir Yakunin became the head of Russian Railways, sometimes called the country’s third natural monopoly, after oil and gas. Sergei Chemezov, who had known Putin since they worked together in Dresden, took over the consolidated arms manufacturer Rosoboronexport. According to one estimate, by 2006 the revenues of the state companies accounted for a fifth of the country’s GDP and a third of the value of its stock markets—and Putin’s friends and allies controlled them.
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The most powerful of all remained Gazprom. Neither Dmitri Medvedev,
its chairman, nor Aleksei Miller, its chief executive, was installed for his particular experience or expertise in natural gas management; both were chosen for their loyalty. Through them, Putin pulled the reins at Gazprom, involving himself in the minutiae of the company’s budgets, pricing, pipeline routes, and even personnel, which he approved “down to the deputy level,” sometimes without telling Miller about important appointments.
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It became such an obsession of Putin’s that many wondered whether he was preparing to take over the company when his presidential term ended. “Thank you for the job offer,” he replied in January 2006 when a journalist asked him the question directly. “However, I am not likely to head a business. I am not a businessman, either by character or by previous life experience.”

Gazprom may have lost the internal jockeying to seize Yukos’s main asset but it continued its quest to expand, and did so with tactics more stealthy and subtle than the expropriation of Yukos. Roman Abramovich, having abandoned Sibneft’s merger with Yukos in 2003 after meeting with Putin (while keeping the $3 billion Khodorkovsky paid him), also found his company facing new tax claims. Facing a $1 billion bill, he quietly negotiated a settlement in 2005 for $300 million
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and promptly sought to sell his controlling stake of the company. He considered offers from Chevron-Texaco, Shell, and Total, but he was savvier than Khodorkovsky, or at least less confrontational, and he could read the writing on the wall.
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In July 2005, Sibneft paid an enormous dividend of $2.29 billion to its shareholders—more than its entire profit two years before—in what was clearly a sign that Abramovich was cashing out and preparing the company for sale. Two days later, at the meeting of G8 leaders in Scotland, Putin confirmed the speculation and acknowledged that Gazprom was the suitor. He insisted that it was a private matter between businesses but also divulged that he had personally been involved in discussions with Abramovich. Gazprom did not have the cash to acquire Sibneft, but Putin announced that the government would buy enough of Gazprom’s shares to give the state majority control, using funds from the state’s coffers. Gazprom then used the infusion of cash to purchase Sibneft for $13 billion, a price so inflated that speculation swirled about the kickbacks that must have been involved.
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The American ambassador at the time, William J. Burns, cabled the State Department that “only a quarter” was said to have gone to Abramovich himself.
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Many others, it seemed, took a share, too.

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B
y Putin’s second term Gazprom, once a sclerotic behemoth, had emerged as the energy giant he dreamed of. It became one of the largest corporations in the world by market capitalization, bypassing stalwarts like Toyota, Walmart, and Sanford Weill’s Citigroup. It had not become any more efficient or well managed, but Putin made it the country’s most powerful business—and a powerful arm of the country’s foreign policy from Asia to Europe. With Chancellor Gerhard Schröder, a leader and friend who had once called him a “flawless democrat,” Putin orchestrated a deal to construct the longest underwater natural gas pipeline in the world, connecting terminals in Russia to those in Germany. The project, eventually known as Nord Stream, would bypass the old Soviet pipeline network through Ukraine, Belarus, and Poland, giving the Kremlin leverage in negotiations over transit fees in those countries and increasing Europe’s dependence on Russia. It was deeply controversial. Poland’s defense minister called it the energy version of the Molotov-Ribbentrop Pact,
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while environmentalists along the Baltic Sea warned of the potential damage of running pipelines along a sea floor littered with munitions from both world wars.

When Schröder was ousted from office in elections that year, Putin appointed him chairman of the shareholders committee of the new subsidiary that would build Nord Stream, only days after the German had blessed the project with a secret loan guarantee worth 1 billion euros. Gazprom owned a controlling stake, along with Germany’s two major energy companies, BASF and E.On, and Putin was in the position to dispense the perquisites. The managing director of the pipeline project, appointed with his blessing, was his old Stasi friend, Matthias Warnig. A week after hiring Schröder, Putin summoned Donald Evans, an oil man and confidant of President Bush who had served as secretary of commerce during Bush’s first term, to an unexpected meeting at the Kremlin and offered him a similar position at Rosneft, hoping to give an international legitimacy to the company that now existed on the pilfered remains of Yukos.
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Evans passed, but Putin had come to believe it was ultimately money that drove men and politics. In Europe especially many proved him right.

Despite disavowing any business acumen, Putin reveled in the details of the country’s biggest deals, negotiating himself and mediating disputes. In July 2005, Royal Dutch Shell acknowleged a staggering cost
overrun in the oil and gas project on Sakhalin Island in the Far East—the product of the country’s first production-sharing agreement, signed in the 1990s—only a week after signing a memorandum of understanding with Gazprom to include the giant in the project. During a state visit to the Netherlands in November, Putin publicly berated the company’s chief executive, Jeroen van der Veer, at a meeting with businessmen in the home of Amsterdam’s mayor.
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Van der Veer had to plead for time at the reception to meet with Putin privately, and the two spent twenty minutes arguing in German about why a $10 billion project had ballooned to $20 billion, delaying significantly any profits the Russian government would receive. Van der Veer tried to explain that the massive project, which included offshore platforms and hundreds of miles of pipeline, required expertise and technologies for producing liquefied natural gas that neither Gazprom nor other Russian companies had. The project would still be profitable, despite the rising cost, but Putin demanded that the agreement with Gazprom be renegotiated anyway. When those talks dragged on for months, the Kremlin unleashed the Ministry of Natural Resources’s environmental watchdog, Oleg Mitvol, who carried out a highly publicized assault on the project for its damage to the environment. That there was an environmental impact on Sakhalin—to salmon estuaries and the breeding grounds of gray whales in the Sea of Okhotsk—was certainly true, but preservation of wildlife had never been such a priority before. Mitvol now threatened to open a criminal case for every tree that had been cut down, making an outlandish estimate that Shell could face $50 billion in fines and fees.
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