Blowout Page 6
The Russian experiment once again proved that early-stage capitalism is a poor vehicle for spreading benefits far and wide. Almost all of those millions of would-be owners treaded in choppy, uncharted, and shark-filled waters, most without a stock certificate to their names. They were still trying to get the hang of credit cards and checking accounts (which were mainly empty). The impatient Yeltsin, meanwhile, steamrolled the national legislature when it tried to slow his dismantling of long-running state monopolies. As with most blunt tactics, Yeltsin’s steamrolling had unfortunate and unintended effects. By the time his drive for privatization was complete, a handful of ambitious and canny sharks—the oligarchs, as they came to be known—had won control of the major industries in various Yeltsin-sanctioned fire sales and rigged auctions. “The jewels of the former Soviet Union industry were sold in a corrupt fashion to a handful of well-connected men, forming the new Russian elite,” wrote Dmitry Gololobov, who had been an attorney working for Russian banks and oil companies in the go-go Yeltsin years.
This handful of well-connected men hadn’t just made themselves millionaires; they had made themselves billionaires. And very quickly. President Yeltsin allowed this decidedly un-populist national heist to run its course with a wink and a nod from the Russian state. “The Russian economy operated on a regime of insiderism, bribery, and coercion,” in the words of the American reporter Peter Maass. And where political primacy makes fortunes and might makes right, much of the commercial life of the Russian Federation wound up as a criminal enterprise controlled in a kaleidoscope of partnerships among oligarchs variously connected to Russian politicians, and a rising class of Russian mobsters. “I would submit all of my wealth to legal scrutiny,” confessed the top dog among Yeltsin-era oligarchs, Boris Berezovsky. “Except for the first million.”
Yeltsin learned to look the other way, or to look the right way. When the Russian voters started to lose faith in their first-ever democratically elected leader—his program of privatization was becoming known as “grabification”—Yeltsin was able to tap the now very deep pockets of the oligarchs to secure reelection. Mikhail Khodorkovsky was among that handful of new rich guys who poured money into Boris Yeltsin’s 1996 reelection campaign—when Yeltsin really needed the help—and he was rewarded for it. Khodorkovsky became a skilled practitioner of “grabification.” He won his controlling stake in Yukos, an odd mash-up of rusty Soviet-era oil-producing companies, at a rigged government auction that was—handily—run by his own bank. And just in time, too, because when the creakily built Russian economy collapsed in 1998, Khodorkovsky’s bank was among the casualties. His last asset standing turned out to be Yukos, which he used all manner of tricks, perhaps not all strictly legal, to hold on to. It seemed worth the effort. Khodorkovsky, a self-styled man of ideas, had a big idea for his last best asset.
Yukos could have toddled along for decades, like the government-controlled Lukoil and what was then the lesser stepchild, Rosneft, using inherited Soviet technology to slowly suck crude oil from fields in western Siberia and sell it on the world market. But Khodorkovsky had a little too much free time now that he had lost almost all of his other businesses. And a little too much intellectual curiosity. And a little too much ambition. He decided to see if he could accomplish what no other Russian businessman had ever successfully done: taking a “Soviet era hulk,” as the Russian oil industry expert Thane Gustafson explained, “and turning it into a modern corporation.”
Khodorkovsky began by rebuilding the corporate governance of Yukos. He made his company attractive to skeptical Western investors by committing to financial transparency and protections for minority shareholders. He established an independent board of directors, released financial statements worthy of the generally accepted accounting principles adopted by the U.S. Securities and Exchange Commission, invited outside auditors to review the books. Most important, he hired experienced and respected executives and managers from French and American oil companies to ensure all these new corporate policies were properly implemented. Then he brought on an unlikely new head of production, an Oklahoma-born oilman who had worked in the United States, Europe, and Africa.
Joe Mach pronounced himself thrilled to make the move to Yukos, and he wasn’t coy about why he was willing to pull up stakes again and go to work in godforsaken Siberia. “It’s the same reason Bonnie and Clyde robbed banks,” he explained to an American newspaper reporter in 2001, after his first year in Russia. “This is where the oil is…not slim pickings like Oklahoma.” Mach fairly salivated at the geologic wonder of his new stomping grounds. “Siberia is the simplest environment in the world,” he would say. “The West Siberian landscape has not changed in 130 million years….You can go a thousand kilometers; it’s the same goddamned sand. All across, it’s 18 percent porosity. The water saturation is very consistent. The other no-brainer is [that] the reservoir pressure is 4,500 pounds and the bubble point’s 1,800. In other words, it’s pure oil. Man, it doesn’t get any simpler than that.”
Problem was, in western Siberia, it had been too simple, for too long. Mach found it difficult to get a quick buy-in for Yukos’s new ambitions from the thousands of Yukos drillers and production pros who had grown up in the Soviet system, where managers were always guarding against the mistake of making too many tractors too fast. There was no urgency about the numbers when Mach arrived at Yukos. There was urgency about maintaining full employment, preferably until the end of time. The governing idea in the Yukos-owned oil fields was to drill new wells constantly and milk even the lowest-producing wells for as long as possible. The roughnecks in western Siberia might not eat well, but they would eat for a lifetime. Stoicism and resignation were the dominant traits in the Russian oil fields. “We never expected anything good,” a Yukos employee had once explained to Khodorkovsky. And if nothing good was coming, the priority would be to make sure that what little you had already never went away.
Joe Mach went in determined to explode the system, and along the way he introduced a gritty new form of Russo-American cultural exchange. He prowled the oil fields, demanding closure of the poorest-producing wells and insisting on employing new methods for the best. The old Russian hands did not much appreciate Mach’s suggested drilling innovations, but they had grudging respect for his volcanic, Oklahoma-style profanity, which he insisted be accurately translated for his Russian auditors. The Siberian roughnecks gave as good as they got. “When Joe first arrived, our guys said, ‘We know everything better than anybody,’ ” Khodorkovsky explained to a Russian newspaper in 2002. “But Joe says, ‘Set the pump lower!’ And they said, ‘Go fuck yourself. [Da poshel ty!]’ Because we knew that if you set the pump low in the well, it’d burn out. Joe insisted. So we lowered it, and it burned out. Another one, and it burned out too. Six pumps burned out, but Joe kept saying, ‘Lower, lower goddamn it! One out of three will burn out, but the other two will work so well that you won’t miss the third one.’ ”
Mach eventually prevailed. He shut down the weakest half of Yukos’s fourteen thousand wells and lowered the proverbial pump in the rest, bringing U.S.-style cutthroat aggression and ingenuity to the Siberian steppes. He used the new and improved hydraulic fracking on the best remaining wells. “I jumped on that enhancement like a chicken on a June bug,” Mach boasted to The New York Times. (Translation still pending.) Production at Yukos jumped more than 10 percent in Mach’s first year on the job, and the company was soon producing a fifth of all the crude oil coming out of Russia.
By then, however, Khodorkovsky’s status as a favored man in the Kremlin was no more. Because the presidency of Boris Yeltsin was no more. A career launched as a crusader against privilege and corruption devolved into, well, a life of privilege and corruption. Yeltsin proved in the end to be a very interested pig at the trough, amassing a tidy private fortune for himself, his wife, his daughters, and select friends. When he resigned on December 31, 1999, sitting at his desk with a festive tinse
l-adorned Christmas tree behind him, he did so under threat of criminal prosecution while overseeing an economic implosion that dwarfed America’s Great Depression of the 1930s. The Russian GDP had fallen by 40 percent. The government defaulted on its debt obligations. The ruble tanked. Russian banks verged on collapse. Inflation soared. Estimates were that an extra three million Russians a year were dying from hunger, neglect, and alcoholism. By the time Yeltsin went, only a handful of Russians was sorry to see him go.
Yeltsin did manage to install his own replacement on his way out of office: a little-known pol who appeared both willing and able to shield the Yeltsin family from criminal prosecution—forty-seven-year-old Vladimir Putin. A trained Soviet KGB operative then heading its successor outfit, the FSB, Putin had done the sitting Russian president the memorable favor of successfully derailing the criminal investigation into the Yeltsin clan. He did so by blackmailing Russia’s prosecutor general with a fake sex tape. Putin made sure the grainy tape of an actor playing the prosecutor general and two prostitutes (playing themselves) was broadcast on Russian television. The poor quality of the video rendered it unconvincing, but Putin made an appearance at the TV studio that night to personally vouch for the tape’s authenticity. His word sufficed. The prosecutor resigned, and the case against Yeltsin was abruptly closed. Yeltsin had rewarded the FSB boss’s intrepidity by nominating him to be the next prime minister. So when Yeltsin stepped aside on the final day of the twentieth century, Vladimir Putin was the next man up for the Russian presidency. “It was like spin the bottle,” said Strobe Talbott, who was monitoring the situation for the U.S. State Department, “and the bottle stopped spinning at Putin.”
Putin was a different kind of cat from Yeltsin. He had not had his head turned by Western pols, or Western economists, or the color-splashed vision of Western plenty that had wowed Yeltsin on his visit to a supermarket in Houston in 1989. Putin was disgusted by Yeltsin’s swoon over the free market and shamed by the public spectacle of Yeltsin’s drunken reel down a path of certain national disaster. Putin had been educated in KGB school and was stewed in the dark arts and dark ethic of that estimable and potent Soviet institution. The sworn agents of the Soviet security forces were all about Soviet security or, now that there was no more Soviet, all about Russian security. They were practiced and practical-minded operatives. They were going to wipe away the embarrassment of the Yeltsin debacle, stabilize the moribund domestic economy, and, most important, reestablish Russia’s sense of honor. “Putin’s objective, and the objective of those who came to power with him,” wrote the late Russia specialist Karen Dawisha, “was to restore the idea of Russia as a Great Power and a state worthy of and demanding respect in international affairs.”
Putin and his security-minded retinue had learned a few tricks for exercising power after branching off from spying into politics to run Russia’s second city, St. Petersburg, in the early 1990s. Like the Yeltsin-made oligarchs, they found that democracy and capitalism, harnessed just so, could still deliver personal benefits just like the old communist regime did. Putin’s team installed and managed a vigorous kleptocracy from their offices at city hall. The citizens of St. Petersburg might suffer from want of food and electricity and decent wages, but Deputy Mayor Putin and his key aides made out splendidly. Putin and his chosen minions—the siloviki—controlled the economic and political life of the city (and began to amass real personal wealth) by working the seams between democratically elected officials, foreign investors, billionaire oligarchs, and organized crime bosses. Putin’s St. Petersburg clan relied on graft, financial manipulation, and violence as needed. There was no government or civil institution powerful enough to check them. The courts and the legal system were not instruments of justice in siloviki hands but instruments of power, or vlast. “For my friends, everything; for my enemies, the law,” the saying went. Putin and his siloviki carried these tools from St. Petersburg to Moscow in 1996 (at Yeltsin’s invitation) and then into the office of the Russian presidency in 2000.
Putin showed a comfortingly calm, competent face to the world when first elected president. He spoke of what was required in Russia to guarantee democracy and prosperity for all and of national self-sufficiency. He promised to be a team player in world affairs. He had oil and gas to provide to the world market!
The Russian people got a less soothing picture of exactly what Putin meant to accomplish in the days leading up to his inauguration, when a leading liberal newspaper in Moscow published the secret siloviki manifesto Reform of the Administration of the President of the Russian Federation. The document was tidy, easy to understand, and uncommonly forthright. Control over the economy and politics would once again devolve to a central authority, that is, the president’s office. The legislature of the Russian Federation, the Duma, would be rendered impotent, as would local governors, administrators, and politicians—no matter how seemingly friendly. Key media outlets would be bought and controlled by the Russian government, to help provide “active agitation and propaganda” in support of Putin, and to actively discredit and undermine any opposition to the same. Who would be in charge of the state’s new modern adventure in securing permanent, unitary, unchallenged power? The institution Putin most trusted: the FSB. “All of the special and secret activities of the Directorate relating to counteracting the forces of opposition to the President,” read the manifesto, “will be entirely in the hands and under the control of the special services.”
The toughest nut for Putin to crack when he first took office was the question of the oligarchs Yeltsin left behind (and their powerful gangster counterparts). A few months into his new regime, President Putin called them all, including Khodorkovsky, to a meeting at Stalin’s old dacha just outside Moscow, still outfitted with the desk and daybed from which Stalin dreamed up his Great Purge of enemies and elites. With that unsubtle setting as an ambient cue, Putin laid down the new law, or more precisely, the new balance of vlast. They could hold on to their ill-gotten gains, Putin told them, and operate as they had for the last decade, as long as they offered no opposition to the new regime in the Kremlin. If anybody in the room was unclear as to the purport of Putin’s message that day, or the genuine feeling behind it, what soon happened to Mikhail Khodorkovsky ended all confusion. “Khodorkovsky didn’t know the limits,” said the chairman of Yukos’s largest rival, Lukoil. “He didn’t realize that when power went from Yeltsin to Putin, things had changed.”
Khodorkovsky’s cardinal sin against the Russian state was being overly successful and overly independent. While production capacity at Yukos had doubled in just four years, production at Russia’s state-controlled oil companies like Lukoil and Rosneft edged up by barely a percent or two a year. Profits at Yukos soared, as did its valuation—from $320 million to $21 billion—as did Khodorkovsky’s personal fortune. “One key discovery he made along the way is you don’t get rich by selling oil,” Thane Gustafson explained in a talk promoting his recent book, Wheel of Fortune. “You get rich by selling stock. He was going around to London and New York and convincing people [Yukos] is worth buying and increasing the capital value of the company. By 2003, Khodorkovsky is the richest man in Russia.”
From the Western vantage point, Khodorkovsky’s (and Yukos’s) success was proof that free-market capitalism was still the bomb, whatever Yeltsin’s fuckups, so powerful it could grow blue-ribbon winners even in the wan, depleted soil of the former Soviet Union. Khodorkovsky’s company had become the premier oil company in Russia because of its superior management, its financial transparency, its commitment to technological innovation. Khodorkovsky and Yukos had won on the merits. In May 2003, The Wall Street Journal, devoted town crier of the free market, ran a loving profile of Khodorkovsky pegged to his next venture. “Late last month, the 39-year-old Mr. Khodorkovsky picked his new battle—one that promises to shake up the world’s $550 billion annual oil market. Unveiling a $13 billion deal to acquire competitor Sibneft and create the world�
��s sixth-largest publicly traded oil and gas producer, he pledged to turn Yukos into the first Russian heavyweight in the global energy arena.”
The story must have produced a series of spit takes among the siloviki manning the presidential offices of the Russian Federation. Putin and his St. Petersburg clan were already wary of Khodorkovsky, and this profile proved him, inarguably, a threat to national security, or at least to siloviki security. The Journal reported that the crown prince of Yukos had been invited to Houston by President George W. Bush, personally, to help map out a plan for greater cooperation between the U.S. and the Russian oil industries; that Khodorkovsky had plans to challenge state-controlled Gazprom’s monopoly on exported natural gas; that Khodorkovsky had plans to fund two anti-Putin political parties and might even be “considering” a run for the Russian presidency. The Journal also recounted for an international audience the story of a recent public meeting Putin had called with key Russian oil executives. The colloquy, held at the Kremlin, was widely publicized and televised across Russia. Khodorkovsky had used the platform to stand up and ostentatiously challenge Putin and to accuse Putin’s pet oil company, Rosneft, of corruption. He had a PowerPoint presentation to back it up! “To those who knew Putin,” Masha Gessen would later write, “it was clear from a characteristic smirk on his face that he was livid.”
All this might have been forgiven, considering the extraordinary tax revenue Yukos was adding to the Russian government till (as much as 5 percent of the annual government take, according to Gessen), but Putin believed by then that Khodorkovsky was also in the middle of entering into a pact that was something near treason. It wasn’t just the noise about promoting anti-Putin political parties; it was worse: Putin learned he was negotiating the deal with Lee Raymond and Raymond’s number two, Rex Tillerson, that would give ExxonMobil 30 percent of Yukos—a deal that might one day permit the American company to gain controlling ownership of the most able and impressive company in the single crucial industry in Russia. Russia might not have been a superpower anymore, it might not have had a first-world military or economy or anything else anymore, but by God Russia had oil. And now Russia was supposed to willingly give that up, too? The thought, to Vladimir Putin, must have been somewhere between nauseating and enraging. Khodorkovsky’s great meritocratic free-market ride came to a screeching halt. For my friends, everything; for my enemies, the law.