The Russia Conundrum

CHAPTER 7

THE CONFRONTATION

In the early 2000s, Vladimir Putin and the Siloviki consolidated their power – and one method they chose was to crack down on independent critics and businesses. They wanted to seize the property of Russia’s leading industrialists because they wanted the cash, and because they wanted to show the country who was boss. Renationalising firms that had been privatised under Yeltsin would send a strong message that the era of liberal capitalism was over and the age of state power had begun. It would also allow them – and this was undoubtedly their main motivation – to take over confiscated assets and place them under their own control, just as they did in their criminal racketeering youth, with all the potential for self-enrichment that implied.

For Putin, the most important and attractive target was oil. He tasked Igor Sechin with bringing the privatised oil companies back under Kremlin control and gave him free rein to do so. Sechin had been in Putin’s service for many decades: he was Putin’s bag carrier in their home town of Leningrad, a KGB functionary who would become a leading member of the Siloviki. After Putin became president in 2000, he had made Sechin his closest adviser and now he appointed him chairman of the board of the state oil corporation, Rosneft, with the brief of taking over the companies that had been transferred to private ownership. Having gained control of Rosneft, Sechin was ruthless in pursuit of assets that would enrich himself and his Kremlin colleagues, including Vladimir Putin. The potential prize money amounted to billions of dollars and Sechin was not going to be deterred.

By now, Yukos was doing well. We had worked hard to transform the company from a polluting, loss-making dinosaur into an efficient modern business; we had battled through the perils of the 1998 crash and I was in no mood to hand over the firm we had created. Boris Berezovsky and Vladimir Gusinsky had been threatened with arrest and worse, intimidated into relinquishing their businesses and moving abroad, but I was not inclined to do so. The Kremlin’s response was to mount a series of threats against me and my colleagues.

In June 2002, I was asked by the newspaper Kommersant if I felt safe in Russia and I had no hesitation in replying, ‘Of course not. As an individual – absolutely not … The risk that I, Khodorkovsky, could be made to disappear? Yes, of course that could happen. But I don’t think they could make Yukos disappear. Society understands that the loss of such a major business would be an unacceptable loss for every single Russian person … That is why even if Putin does not like our company, he still talks to us…’ My optimism, as events would prove, was hopelessly misplaced. Within months, the talking would stop and the repression would begin.

In January 2003, we were considering making a bid to buy an oil extraction business in northern Russia called Severnaya Neft. The owners were asking for $200 million, which was well over the realistic asking price. No oil company was willing to pay it. But then we heard that Rosneft had bought the firm for a ridiculous $600 million, at least three times its real value. The deal had the hallmarks of corruption and it was likely that the excess $400 million of public funds furnished by Rosneft had simply gone into someone’s pocket. For me, it was the last straw, the final confirmation that the Siloviki were pushing Putin away from leading Russia on the path of transparency and integrity towards the old ways of cronyism and corruption. As for Putin himself, despite all his ills, I thought that maybe he was still undecided about which way to go. I would soon realise that I was mistaken.

On 19 February 2003, Putin summoned the country’s leading businessmen to another meeting in the Kremlin. It was one of a series of widely publicised forums that were designed to show the people that the president was taking seriously the problems of ordinary Russians. Recordings of the meetings were shown on national television and reported in the press. The subject of this particular meeting was ‘the fight against corruption’. The participants were expected to talk about the need to tackle corrupt practices and we thought the presence of television cameras would ensure that the president would express his determination to do something about it. We thought he would give the green light to us and our political allies in the government and the administration to take practical measures to change things for the better.

After a series of speakers had mouthed meaningless platitudes, the microphone came to me. I had prepared a speech, complete with slides, that would deliver a stinging rebuke to those who perpetuated corruption in Russia, up to and including the president himself. When the moment came, I was nervous, but I pressed ahead. ‘Corruption in Russia – a brake on economic growth’ flashed up on the participants’ screens, followed by a damning series of statistics. According to opinion polls, 27 per cent of Russians believed corruption to be the most dangerous threat to the nation; 49 per cent believed corruption had spread to the majority of state officials, including the police, the tax and customs agencies, the security services, the judiciary, the traffic police and the highest levels of federal power. The finding that almost half of the Russian population believed the president and his closest allies to be corrupt sent a buzz around the table. Putin was listening and staring at the slides, but like the trained KGB man he was, he betrayed no sign of emotion.

The next statistics were about people’s views of the Kremlin’s relationship with corruption: 32 per cent of Russians, reported the pollsters, believed that the Russian leadership would like to tackle corruption, but was powerless to do so; 29 per cent believed our leaders could tackle corruption but chose not to do so; and 21 per cent believed it neither wished nor was able to tackle it. The meeting had moved from the empty expression of pious hopes to something much more concrete: evidence that one third of Russians believed their president to be powerless in the face of organised corruption, while another third believed he was complicit in it.

I could see that Putin’s patience was running out. He was looking at me with steely eyes, a tense, fleeting smile on his lips, ready to cut me off. But I had something more to say, this time about a specific instance of corruption involving one of the president’s own sidekicks. ‘We need to make corruption something that everyone is ashamed of,’ I said. ‘Let us take for example the purchase by the state oil company Rosneft of the firm Severnaya Neft…’ There was silence in the room; all those present knew I was accusing the president of Russia’s inner circle of personal involvement in a crooked business deal. I forced myself to continue. ‘Everyone knows the Severnaya Neft deal had an ulterior motive … I have to tell you that corruption is spreading in our country. You could say that it started right here – and now is the time to end it!’

Unbeknownst to me at the time, the beneficiary of the Severnaya Neft deal was not merely a sidekick of the president, but the president himself. I was told later by sources close to Putin that the missing $400 million had gone directly into his personal account, so I was in fact accusing him personally of sitting at the centre of the web of corruption. His response was telling. Instead of denying the charges, he retaliated with a not very veiled threat against me and my company.

‘You mentioned Rosneft,’ Putin said, ‘and the deal to buy Severnaya Neft … The first things to say about that are clear: this is the state oil company and it needs to increase its stocks of oil, which are currently inadequate. But some other oil companies, including for instance Yukos, have got excess reserves. The way it got hold of them is a question that forms part of the theme we are discussing today. And that theme also includes questions about the payment or the non-payment of taxes. You and I have at times talked about the problems your own company has had with tax payments, although, to be fair, the leadership of Yukos reached an agreement with the tax office and dealt with … or is dealing with … all the charges against it, all the problems with the state. But nonetheless, one has to ask, “Why did these problems arise?”’

Putin had evidently been taken aback by my words. Unusually for the calculating KGB man that he is, he was shocked into an unguarded response, first raising the question of Yukos’s own oil reserves, then muttering darkly about an alleged underpayment of taxes – an issue that he and I had discussed and resolved to everyone’s satisfaction several weeks earlier. After this initial outburst, he forced himself to regain control, even acknowledging that we had in fact settled the tax issue, which is pretty much Putin’s modus operandi – attack, then take a step back. It allows him to observe a person’s reaction, affording him time to plan his follow-up, then launch his deadliest assault when his target is thrown off guard.

His anger was clear, and so was the threat. He was horrified to have the business machinations of his close entourage exposed to the Russian people. I had challenged him and he came out against me. The way Putin responded to my challenge was the clearest possible signal of where he would take the nation in the years ahead. Since then, Putin has taken Russia down a route that is a dead end; a dead end for the economy, for society, and the wellbeing of the Russian people. As part of his programme to replace liberal market democracy with centralised state autocracy, Putin would need to crush all those who had other ideas. I came away from the meeting satisfied that I had not shirked my duty of speaking out against institutionalised corruption, but I was also convinced that punishment would not be long in coming.

The months that followed my confrontation with Vladimir Putin were actually good for me and for Yukos, though my meetings with him became scarcer. In the spring of 2003, we announced that we would build a pipeline to carry oil from our Siberian fields to the fuel-thirsty industries over the border in China. We were closing in on a major takeover of the Russian oil company Sibneft and we were in negotiations with two American oil giants – ChevronTexaco and ExxonMobil – for one of them to become a partner in the new conglomerate we were about to create. The oil price, extraction rates and refining capacity were all rising and our profits rose with them. In the first nine months of the year, we netted just over $3.5 billion, compared to $2 billion for the same period in 2002, while turnover jumped from $7.95 to $12.2 billion. In April, Vladimir Putin formally congratulated Yukos on the tenth anniversary of the company’s founding, sending us a gushing message of encouragement. ‘The effective organisation of work,’ Putin wrote, ‘high professionalism and responsibility of employees allow the company not only to maintain, but to expand its position on the domestic and foreign market.’ But his praise was through gritted teeth – our workers didn’t receive any of the usual congratulatory state bonuses – and just two months later, Putin began his campaign to destroy the company.

The early months of 2003 were dominated by the build-up to the American and British invasion of Iraq, a move the Kremlin was convinced was motivated by the desire to seize Iraqi oil. The Russian ambassador to the UN opposed the planned invasion, announcing that he would veto any resolution that declared it legal. Iraq had been an ally of the Soviet Union and Putin was desperate to maintain the Kremlin’s influence there. But I looked at it in a different way. It was clear that if George Bush wanted to invade Iraq, he would do so whatever the Kremlin said. So, instead of opposing the US, I argued that Russia should take the opportunity to forge an alliance with Washington. If Russia were to support the US on Iraq – and offer to shore up America’s oil supplies with Russian oil in the event of a lengthy conflict in the Middle East – it would foster a ‘special relationship’ between the two countries, similar to the one enjoyed by the UK.

On 13 March 2003, a week before the invasion began, I gave an interview to BusinessWeek magazine, entitled ‘A Russian’s plea to back America’. In it, I said it would be foolish to let the opportunity for a long-term strategic partnership with the US slip through our fingers. ‘For economic development, Russia needs investment, Russia needs highly trained people, Russia needs markets, Russia needs technologies. When we take a look and see who would be the greatest benefit to us in all these directions, the answer is clear: America. Then there’s the matter of security, which has nothing to do with business. We’ve got a lot of regional problems and our only realistic ally is America. So if we’re going to prioritize things, then we have to say the most important relationship is with America.’ When the interviewer asked me if I had conveyed my views to President Putin, I answered, ‘He knows where I stand. It’s not a secret … I am well known in Russia for my pro-Americanism.’

I had invited world-class Western experts, including American specialists, to help improve the way Yukos was run. I had brought in US technology and know-how and had promoted the US as a vital market for Russia’s oil exports. I had founded the philanthropic foundation Open Russia, which at various times had Henry Kissinger, Jacob Rothschild, Lord David Owen and the former US ambassador, Arthur Hartman, on its board of trustees. Our negotiations with the American oil companies were a big part of our long-term business strategy to operate in the global market, as attracting American investors would be good for Yukos and for Russia. I had always kept Putin informed of our plans, with regular updates of what we were proposing. His replies were encouraging: he told us we were right to go in this direction.

My last face-to-face encounter with Vladimir Putin took place on 26 April 2003. I had asked for a private meeting, because the talks on our takeover of Sibneft and the negotiations with the American oil companies were at a delicate stage. Putin listened carefully and indicated that he was supportive of our plans. He did not mention the clash between us at our confrontation in the Kremlin the previous February. Only at the very end of the meeting did he raise a note of caution. There were parliamentary elections scheduled for the end of the year, Putin said, and he did not want Yukos to play any role in the campaign. He asked me to pledge that we would not support or finance the efforts of any opposition parties. I answered that Yukos was not involved in any political financing, but that individuals in a free parliamentary democracy must reserve the right to donate to any party of their choosing. I heard later that after I left, Putin flew into a rage and accused me of defying his commands.⁶ Coming after our public confrontation in February, the meeting was another blow to our relations.

In retrospect, it may seem as if I was naive to believe the reassurances I was receiving from Putin, but I also had other highly placed contacts in the Kremlin who were giving me the same encouraging signals. These were the remaining liberals in the leadership, men who had served under Yeltsin – the so-called ‘Family’ – who, I believed, still carried the torch of freedom and democracy. They included the prime minister, Mikhail Kasyanov, and the Kremlin chief of staff, Alexander Voloshin. The fact that they had stayed in high office after Putin replaced Yeltsin in 2000 indicated to me that there was still a faction in the leadership who believed in liberal values and were doing their best to resist the domination of the hardline KGB operatives of the Siloviki.

My clash with Vladimir Putin had brought to a head the battle between the liberals and the hardliners in the Kremlin and, with it, the battle for the future direction of Russia. While Kasyanov and Voloshin were defending the interests of private business and a free market, Igor Sechin and his cronies were telling the president to act against Khodorkovsky and Yukos. Putin’s decision would determine which Kremlin faction emerged victorious.

An unmistakable indication of Putin’s intentions came in June 2003, when a detachment of special forces stormed into the office of Yukos’s head of internal security, Alexei Pichugin, and ransacked his filing cabinets, impounded his safe and informed him that he was being arrested on charges of attempted murder. It was the Kremlin’s opening shot in a war that would not be long in coming, the first clear signal that the liberals had lost out to the Siloviki in the battle for the president’s ear.

Alexei Pichugin’s job was to protect Yukos’s real estate and crack down on theft within the organisation. He was a professional operator, tough but fair, and a family man with a wife and three young sons. But the Russian Prosecutor’s Office was making out that Pichugin was a ruthless killer, hiring hitmen to intimidate and eliminate business rivals. His arrest was a signal to us that Yukos was in their sights, that Putin and Sechin were intent on intimidating us into becoming another feeding trough for Putin’s cronies.

When we refused to knuckle under, the arrests continued. On 2 July 2003, the chief executive of Group Menatep, Platon Lebedev, was taken from his hospital bed, where he had been recovering from cardiovascular dystonia and chronic hepatitis, by police with guns and handcuffs and led to a waiting prison van. Lebedev was my long-time business partner and friend, involved in all our investment decisions, financial reporting and legal affairs. He was a key figure in the hierarchy of our holdings and his arrest was a dramatic escalation in the Kremlin’s assault against us. Lebedev’s arrest was a naked act of intimidation. The charge sheet that was eventually drawn up against him involved seven separate articles of the Russian penal code, ranging from ‘Grand theft of property by an organised criminal group’ to ‘Malicious non-compliance with a court ruling’ to ‘Conspiracy to evade corporate tax obligations’ and ‘Evasion of personal tax and social security obligations’. I spent the next 48 hours on the phone, trying to get an explanation of what was going on. Kasyanov told me he had spoken to Putin, who had asked him to relay the message that the arrest was ‘not political’. Voloshin rang to say he was working on Lebedev’s behalf. But the situation was serious. No one had any doubt that this was deliberate intimidation.

The news from prison was that Lebedev was refusing to cooperate with the investigators and had been involved in an angry confrontation, accusing them of violating his civil rights and using false pretences to keep him in custody. As the stand-off escalated, Lebedev was moved to Moscow’s high-security Matrosskaya Tishina Prison, where he was held in harsh conditions. I was next on the list.