The Russia Conundrum

CHAPTER 9

PUTIN UNBOUND

The arrest of Yukos’s head of security, Alexei Pichugin, in June 2003 and then our chief executive, Platon Lebedev, in July was a declaration of intent. Putin had taken offence at my denunciation of official corruption at our February meeting in the Kremlin; he disapproved of our plans to take Yukos on to the world stage in partnership with the Americans and he was alarmed by reports – not all of them accurate – that I was planning to go into politics to champion a pro-Western, liberal democracy. The fact that Putin opted to arrest my colleagues rather than come directly for me indicated that there were still some restraining influences in the Kremlin, that the old-guard liberals who shared my commitment to free-market democracy were still striving to mitigate the predations of the Siloviki.

It has been suggested that Putin was giving me a warning, hoping to persuade me to back down over Yukos’s collaboration with the Americans and eat a good helping of humble pie. This was something I was not prepared to do. It would have meant renouncing everything I stood for – the freedom to conduct business, to express independent views, to stand against the restrictive, stultifying model of xenophobic autocracy that Russia was being drawn into; and it would have meant abandoning my comrades who were now bearing the brunt of Putin’s anger. Pichugin and Lebedev were in jail, later to be joined there by another eight Yukos employees, and our lawyers were being physically threatened by the FSB. The pressure was being ratcheted up and there was much anxiety among Yukos employees and their families.

Meanwhile, Pichugin had been transferred to the infamous Lefortovo interrogation centre, where he was pressured to give false testimony implicating the Yukos management in plots to intimidate business rivals. Pichugin refused to perjure himself, so the interrogators injected him with a psychotropic drug that left him disoriented and confused. Despite all the intimidation, the Kremlin was unable to substantiate any of its allegations. When the Moscow Basmanny Court announced that proceedings in the Pichugin case would be held behind closed doors and that defence lawyers would be barred from revealing the contents of the hearings, over a hundred members of the Russian parliament signed a petition of protest, something that would be hard to imagine today. It was becoming a very public dispute with battle lines drawn on both sides.

The Yukos case was of vital national importance for Russia. It was not just a business dispute, a legal battle or a clash of personalities; it was a battle between two diametrically opposed, mutually exclusive ideologies, from which only one could emerge victorious and become the master of the nation’s future.

The schism in the Kremlin could hardly have been clearer. On the one hand, liberals like Prime Minister Mikhail Kasyanov were backing business and enterprise, a free-market economy and good relations with the West; on the other, hardline Siloviki such as Igor Sechin and Viktor Ivanov were attempting to return Russia to a centralised, statist model where strategic industries were controlled by the government and used to challenge the West rather than cooperate with it.

On 8 July, Kasyanov gave a press conference in which he denounced the trumped-up charges against Lebedev. ‘It isn’t right to arrest [him] for these alleged economic crimes,’ Kasyanov said. ‘There are enough real crimes being committed that actually threaten people’s lives … this is producing an adverse effect on the country’s image and a negative impact on the mood of investors.’ An anonymous government source, most probably the Kremlin’s chief economic adviser, Andrei Illarionov, was quoted by newspapers as saying ‘the sensible part of the presidential administration and the government believes that [this case] is inflicting damage on the Russian economy. Regardless of what happens to Lebedev, the negative consequences of what is happening now are already obvious.’

The ‘damage’ included a $20 billion fall in the Russian stock market in the space of two weeks; the ‘negative consequences’ would grow and grow until the international community would lose faith in the reliability of Russia as a place to invest. The newspaper Novaya Gazeta warned that Putin was now in thrall to the former KGB men who made up the Kremlin Siloviki. Referring to the Siloviki as ‘KGB Inc.’, the newspaper said they were exhibiting the security services’ traditional mistrust of the West and that ‘Khodorkovsky’s Western-friendly beliefs’ were perceived as particularly threatening. By crushing Yukos, they claimed to be combating Western influence. The Yukos arrests had triggered a showdown that would determine not only the fate of the country’s business model, but the future of Russian democracy.

On 3 July, I was summoned by the Russian State Prosecutor. I was told I was being questioned solely as a witness, but the threat was palpable. Afterwards, when I was asked by journalists if I was planning to leave Russia, I said I wasn’t. ‘I do not plan to leave Russia. I should have travelled to London today, but I decided to stay right here … I am not hiding and I don’t plan to become a political émigré. If it’s a choice of forcing me out of the country or putting me in jail, then they’ll have to put me in jail.’

A month later, FSB troops raided Yukos’s offices, seizing documents and computers. In September, they stormed into the boarding school for orphans that the Open Russia foundation ran outside Moscow. Armed men in masks ripped out the IT system and seized the children’s laptops. I asked for a meeting with Putin to seek an explanation, but was told this was not possible. In the past, I had been granted access to him whenever I needed it, even after our relationship had soured, so his refusal to see me now was the clearest possible signal that things were serious. I had instead a meeting with the FSB director, Nikolai Patrushev, whose offer to me of a ‘compromise’ settlement with terms he knew would be completely unacceptable confirmed that the crisis was reaching a head. I told my colleagues and fellow directors at Yukos that they should leave Russia while they still could, but that I had taken the decision to stay. At the beginning of October, I was a guest of the US–Russia Business Council in Washington, DC, and used the occasion to tell the world about the critical struggle between democracy and tyranny, between liberal reform and a return to repression and isolation, that was being played out in my homeland:

You have no doubt heard that one of the reasons for all this happening may have been my political activism … But the question before us right now is much bigger, a much more far-reaching choice: is Russia going to become a democratic country for the first time in our thousand-year history, or are we going to continue along our thousand-year path of authoritarianism? Russia has no hope of becoming a modern society in the economic sense without becoming the same in the democratic sense.

I paused, and then sought to clarify the stakes:

So, right now is a critical moment for Russia. Russian society is about to resolve the question of which path our country is going to follow. Which model of development are we going to choose for our country: the authoritarian one, or the model of a civilized modern state? I very much hope that we will make the right choice. And foreign investment is a great help to us in this. When we meet to celebrate the next ten years in 2013, we will already know the answer to the question of which path Russia took. I very much hope – and this is in all our interests – that Russia will have taken the right path.

I was arrested on 25 October 2003, on a scheduled airport stopover during a business trip to Siberia. On my last day of freedom, I had been asked by a journalist in Tomsk what lay behind the Kremlin’s attack on Yukos and I tried to explain that this was a proxy battle between two factions of powerful men with very different visions for Russia’s future. ‘We are being attacked not because of something we did. It is the very existence of an independent force like Yukos that they see as a threat to them. And by “them” I mean those [politicians] who are still stuck in the old ways of thinking. I don’t want to get into naming names, but I firmly believe this whole affair is the result of a struggle for power taking place between the different factions in Vladimir Putin’s entourage.’

The proceedings against me became a political trial of strength between two ideologies; I was supported by the remaining liberals in the Kremlin, including Kasyanov, Voloshin and the chief economic adviser Andrei Illarionov, who believed in the values of free-market economics. They staked their credibility on exposing the ludicrousness of the trumped-up charges against me and against Yukos, but they were outmanoeuvred by the Siloviki. The politically motivated guilty verdict in my trial, and the prison sentence which I later discovered had been personally decided by Vladimir Putin,⁸ signalled the rout of the Kremlin liberals: to a man, they either resigned or were fired, and – with their departure – what may turn out to be the last chance of a liberal future for Russia was gone. From now on, strategic industries would be controlled by Putin’s cronies; they would be used for their personal enrichment, to challenge the West rather than to strengthen cooperation with it, and certainly not for the good of the Russian people. Putin’s mission to ‘make Russia great’ would lead to a new toughness in international relations; Moscow’s rhetoric would become ever more strident and Russia’s neighbours would be held to ransom by cutting off – or threatening to cut off – oil and gas supplies. The Kremlin would become tougher in its attitude towards domestic opposition; the spectacle of my show trial would deter independent figures from entering the political arena; and ordinary citizens who tried to protest or organise opposition would find themselves on the wrong end of police batons.

The events of October 2003 confirmed the triumph of the Siloviki. Spurred on by Sechin and Viktor Ivanov, Putin would move to reimpose the deadening model of state control that had darkened Russia’s past, subordinating the position of business, subverting democratic freedoms and individual rights. Not only would Yukos be destroyed, but also its charitable foundation Open Russia, along with many other charities and non-governmental organisations that aroused the suspicion of the Kremlin. Civil society would be reduced to a minimum; the press, including, in time, social media, would be brought under state control; a meaningful parliament and gubernatorial elections would be abolished. At the end of Yeltsin’s term in power, business did not depend directly on the Kremlin; after Yeltsin, it became a necessary condition for the normal functioning of any company.

Yukos was chosen as the vehicle by which the Siloviki engineered all these changes. It was chosen because the spoils were so immense, and because it represented everything the Siloviki hated. It was an open, transparent company, operating to Western standards of probity; it had no hidden depths of corruption and it strove for integration into the Western economic system. Like Yukos, I too adhered to Western values. I had founded charitable organisations; I had promoted education and the preservation of Russia’s intellectual potential, including the modernisation and computerisation of the country; I was proposing to strengthen relations with China by building a pipeline from Yukos’s Siberian oilfields; and I was partnering with American companies to expand Russian business in the West. Putin didn’t like any of this. His model was to keep business, the individuals who run it and the whole of the rest of the country on a short leash.

The FSB commandos who arrested me in Novosibirsk, the officials who arraigned me in the State Prosecutor’s Office and the jailers who hosted me in Moscow’s Matrosskaya Tishina prison were unfailingly polite, at times mortified by the pantomime they were obliged to act out. The junior prosecutor who read me the charge sheet seemed embarrassed by the ludicrousness of the accusations – theft, fraud, tax evasion, both personally and by the company I led, ‘amounting to damage inflicted on the Russian state in the extent of $1 billion’.

It was the first step on the road towards a trial, in which the charges would become ever more absurd. Before October was out, the Energy Ministry had announced it was investigating the validity of all Yukos’s oil extraction licences and the Prosecutor’s Office had frozen 44 per cent of the company’s shares. It was the first time private assets had been seized by the post-Soviet state and it was a harbinger of a disturbing new era in Russian politics. A flood of protests from pro-business figures in Russia and abroad warned that the Kremlin was turning back the clock to the old days of Soviet repression. The US Senate passed a unanimous resolution demanding that Russia guarantee the full legal rights of the imprisoned Yukos directors. The American ambassador in Moscow, Sandy Vershbow, warned that the arrests would ‘negatively affect foreign investment in Russia’ and, bang on cue, the stock market lost a tenth of its value in one day.

Arriving at my trial in Moscow surrounded by prison guards

In October 2003, I was Russia’s richest man. I ran the most important corporation in the most important sector of Russia’s economy. I was a prominent philanthropist, socially active and well known in Russia and abroad. I am not saying this to boast, but rather to give you an idea of what it meant for Putin to have me locked up. It was personal for Putin, but most importantly, it was political.

I knew exactly why Putin was doing it. I had challenged his authority, and that is the one thing that autocrats cannot allow to happen. The authority of dictators lies not in the legitimate conferral of power by the freely expressed voice of the people, but on the maintenance of the myth of their invincibility. So long as Putin is able to convince the Russian people that his rule is unassailable – and he does this through threats, manipulation and increasingly through brute force – he can hope to remain in power. But once he permits his infallibility to be questioned, he risks undermining the aura of omnipotence that guarantees his survival.

My arrest therefore did not come as a surprise. What did surprise me was the inexplicable sense of relief that came over me as I was led away. Looking back, I can see why I felt that way. Over a span of several months, there had been an inexorable expectation that this arrest was about to happen. I was resisting the political drift of my country at that time. I wasn’t the only one, but I was the focus. The Kremlin had allowed me time to leave the country and hoped that I would stay away. But I felt I had to return, and once I did, the countdown started. So, you could say a certain weight lifted off my shoulders. I knew they were coming for me; it was time to stop the charade and move to the endgame.

The hardest thing in the first few weeks after my arrest was the uncertainty. I didn’t mind sharing a cell with hardened criminals – most of them were nice to me and curious to hear why someone like me had turned up so unexpectedly in their jail. I didn’t mind having my hands cuffed behind my back every time I was taken for questioning, and I didn’t mind the prison food and the bedbugs, or even knowing that there were stoolpigeons constantly spying on me. But I did resent the strain it put on my family and friends. Inna stood in line to bring me parcels of food to supplement the prison porridge. My mother, Marina, and my father, Boris, stood for hours outside the courthouse on days when I was due to appear there, hoping to touch me in the brief moments as I walked from the prison van to the entrance. Inna and the children were living in our family home in Zhukovka outside Moscow and she was struggling to convince the kids – and herself – that I was all right and would soon be released. I asked my parents to move in with her to lend a hand.

At first, I had a large cell all to myself, but I was soon joined by other prisoners. They immediately established a supply line through which mail, vodka, food and cigarettes would appear. I ran into a few acquaintances, including one in the cell opposite mine. I was amazed to learn how many people with whom I had lost touch had not actually gone abroad, but were here in jail.

Arriving at the courthouse once again

I wasn’t nervous, but I was concerned about what might be put in my food – I remembered Pichugin’s experience with the psychotropic drugs – so I refused to eat or drink anything that the jailors gave me. I drank water only from the tap, until I got my head around the situation. It took me three weeks. Now, I would say that knowing how to behave if you get arrested or taken hostage is a useful skill to learn. I recommend that anyone engaged in business, politics or social activities in Russia should learn it, because it can happen to you.

It is vital not to torment yourself with hopes of early release or worrying about what you left unfinished while you were free. It is important to say only what you consciously want to say – to speak only for your own benefit and nothing beyond that; it is astounding how things you say inadvertently can be turned against you as soon you are arrested. I can’t remember much of what I asked to be brought from home. I could easily get by without most things, but I had books, pens and notebooks brought in as fast as possible. I was preparing for a long fight and a long time inside.

My arrest triggered ructions at the highest levels of the Kremlin. On 30 October, Alexander Voloshin resigned from his post as Putin’s chief of staff in protest at my detention. He was swiftly replaced by Dmitry Medvedev, then a largely unknown young technocrat, whose first act was to criticise the freezing of Yukos’s assets. Medvedev said on national television that law enforcement agencies were sometimes prone to an ‘administrative frenzy of zeal, with ill-thought-out consequences that affect the economy and cause outrage in national politics’. Medvedev questioned whether the seizure of Yukos’s shares was ‘legally effective’, giving rise to hopes that the dispute might still be settled amicably. It sounded to me like an olive branch and I decided to take it. My overriding goal was to save the company I had built and to protect the people who worked for it. If my resignation could help to achieve these things, it was my bounden duty to do so. I issued a statement from my prison cell.

I had set myself the goal in the years ahead of building an international energy company – a leader of the world economy. But the situation that has developed today forces me to set aside my plans to continue my personal involvement in Yukos’s development. As a manager, I have to do all I can to pull our workforce safely out from under the blows that are being directed at me and my partners. I am leaving the company … We were the first Russian business to consistently implement the principles of financial transparency and socially responsible business behaviour. We introduced international standards of corporate governance. We were able to achieve absolute recognition and trust on the Russian and global markets … Taxes paid by the company to all levels of government will be in excess of $5 billion this year. Over $100 million is spent annually on philanthropic programmes … I shall now devote myself to building in Russia an open and truly democratic society through my continuing work as chairman of Open Russia.… Wherever I may work, I shall give my all for my country, my Russia, in whose great future I firmly believe.

As well as resigning as head of Yukos, I also gave up my stake in the company. I transferred all my shares to my deputy, Leonid Nevzlin, who was by now in Israel, and informed the Kremlin that I would be happy for the whole of my personal fortune to be used to pay off any bill for Yukos tax arrears, if that would help to save the company.

Putin was playing a devious game. He continued to send conciliatory messages via Mikhail Kasyanov and others, suggesting that the whole affair was a mistake and would soon be sorted out. But he was toying with us. At the same time, Igor Sechin was showing no mercy. Sechin and the Siloviki were intent on destroying Yukos for their own reasons. They wanted to put an end to the era of free markets and private ownership, to return to state dominance or, rather, their own control of the economy; to humiliate the remaining liberals in the Kremlin by publicly demonstrating their impotence to stop this happening; and, most importantly, to satisfy their own personal greed. Putin directed the operation personally, using Sechin and Viktor Ivanov to do the dirty work. He crushed Yukos and handed its assets to his cronies as a reward. Yukos was gobbled up by the state oil company, Rosneft, shortly after Sechin was appointed its chairman. Absorbing Yukos made Rosneft a giant in the industry and Sechin had ultimate control over where its profits went.

But the importance of the Yukos case was not just the great financial interests at stake, the vast fortunes lost and gained; not just the personal dramas, the years wasted in the jails and prison camps, the loss of health and happiness and even, on occasions, lives – it was the pivotal role it played in the battle between the liberals and the new hardliners in Russia. It was the test case that demonstrated the annihilation of the former and the apotheosis of the latter. From Yukos onwards, the country would increasingly turn its back on the Yeltsin years of liberalisation and opening to the West; it would see the inexorable rise of nationalist, conservative forces who believe that economic freedoms and individual rights must be subservient to the interests of the state, that America and Western Europe are natural enemies, not natural collaborators. In February 2004, four months after my arrest, Putin announced that he was firing his Prime Minister Mikhail Kasyanov and the whole of his government. He said he wanted a clean break with the old administration in advance of the following month’s presidential elections.