Strongman (22 page)

Next to go was Putin’s economics adviser, Andrei Illarionov – the man he had taken on despite his views on the futility and brutality of the Chechen campaign. Illarionov walked out
in December 2005 after five years with Putin, delivering a devastating verdict on the country Russia had become. The country was no longer free and democratic, he said, but run by state
corporations acting in their own interests. Until recently, he said, he could express his views freely, but now the political and economic system in Russia had changed, and he could no longer stay
in post.

In the year following the arrest of Mikhail Khodorkovsky, the
siloviki
moved to grab his assets for themselves, even before he was found guilty of anything. The sell-off of his oil
company Yukos to the state was accomplished in a stunningly cynical way. Claiming that it was owed more than $27 billion by Yukos, the government arranged an auction on 19 December 2004 to sell off
the company’s main production unit, Yuganskneftegaz, to cover the tax claim. The state gas monopoly Gazprom registered to participate in the auction through a new oil subsidiary, Gazprom
Neft. So did a company called Baikal Finance Group, which had only been created on 6 December. Its registered office was at an address used by a vodka shop, a mobile phone operator and a travel
agency in the city of Tver, north of Moscow. Who its owners were, no one knew. Nonetheless it secured a massive loan from the state-owned Sberbank in order to participate in the auction. On the
day, Gazprom Neft declined to place a bid, leaving the obscure Baikal Finance Group to buy Russia’s largest oil company for $9.3 billion.

Two days later, on a visit to Germany, Putin declared with a breathtaking pretence of innocence that the shareholders of Baikal Finance Group were ‘people who have been in the energy
business for many years’, and that ‘as I have been informed, they intend to develop some sort of relationship with other energy companies in Russia, which are interested in this
stock’. He didn’t know which companies they might be, of course, but ‘state companies have the same right as other players in the market’.

At his annual press conference on 23 December, Putin couldn’t quite remember the name ‘Baikal Finance Group’ any more. That day it had been bought in its entirety by none other
than Igor Sechin’s Rosneft. Sechin, it is thought, was the founder of the mysterious and short-lived Baikal Finance Group. ‘Today, the state, using absolutely legal, market mechanisms,
is ensuring its interests,’ said Putin. ‘I consider this perfectly normal.’

Meanwhile the trial continued of the man who had built Yukos into an oil giant in the first place. In May 2005 Mikhail Khodorkovsky was found guilty of fraud and sentenced to nine years in
jail.

The energy weapon

Western governments – and Western investors – watched these events unfold with some trepidation. But there was worse to come. The repercussions of the Orange
Revolution were far from over.

The new Ukrainian president, Viktor Yushchenko, headed straight for Moscow on 24 January 2005, the day after his inauguration, and President Putin seemed to appreciate it. When the Ukrainian
referred to Russia as a ‘permanent strategic partner’, Putin noted, with a hint of surprise, ‘What you just said about strategic partnership is a very good and very pleasant
sign.’

Nonetheless it was a meeting without smiles. Yushchenko felt misunderstood. He said in an interview: ‘My major concern was that all the steps we were taking, especially when it came to our
democratic reforms, or the revival of our history, or the integration of Ukraine into the rest of the civilised world – Russia took all of these as anti-Russian steps.’
¹⁸

It was a perfunctory visit, lasting only half a day. Then Yushchenko headed straight for Strasbourg to the Council of Europe, and to Brussels for a speech to the European Parliament. When he
went to Washington in April he was received as a hero. He earned rapturous applause when he told Congress: ‘Today Ukraine is looking into the future with great hope and expectation. Free and
fair elections have brought to state office a new generation of politicians not encumbered with the mentality of the Soviet past.’

Then he was taken to the Oval Office to meet George W. Bush. The president’s chief Ukraine adviser, Damon Wilson, recalled in an interview that Yushchenko seemed to lack focus. ‘He
began the conversation by discussing the challenges he was facing as president of Ukraine, in particular the relationship with Russia. He began to set out, I think it may have been 12 points or so,
a whole series of particular issues that he saw he needed to work through with Russia. And as he began to enumerate these challenges in a rather longwinded way, President Bush stopped him. He said,
you don’t need to worry about these 12 challenges, you have one challenge you need to be concerned about with Russia – is Moscow prepared to see an independent sovereign democratic
Ukraine make decisions about its own future? That’s the strategic challenge you face.’
¹⁹

Wilson says the Americans were rather worried after that first visit. ‘We were quite concerned whether he understood the scale of the task before him – whether he understood how to
go about addressing these issues. And, you know, while there was still a lot of enthusiasm and a lot of support, and a commitment in policy terms to figure out how to help him succeed in his task,
his visit to Washington really did raise the first alarm bells – that we might have more difficulty than we thought, and how he could follow through on the promise of the Orange
Revolution.’

The alarm bells rang louder at the end of the year when Yushchenko surprisingly struck a shady deal that the Americans thought stank of corruption, in order to dig himself out of a major crisis
over Russian gas imports.

The first of Putin’s ‘gas wars’ began in March 2005, when the Russians apparently decided to punish the Ukrainians for their Orange Revolution by announcing that, from the
following January, Gazprom would more than quadruple the price of its exports to Ukraine from $50 per 1,000 cubic metres to around $225. The situation was complicated by the fact that Gazprom also
supplied 25 per cent of the European Union’s gas, mainly through pipelines crossing Ukraine, for which Kiev charged Gazprom transit fees. (Some countries relied 100 per cent on Russian
supplies through Ukraine.) Russia supplied gas to all its former Soviet republics at prices far below world levels. But now that Ukraine was snubbing it and declaring itself to be allied with the
West, Moscow saw no reason to continue to subsidise it.

In October Yushchenko’s chief of staff, Oleh Rybachuk, was summoned to Moscow and given a stern warning: agree to the price hike, or your gas will be turned off. ‘Putin was warning
us that this isn’t a threat, we’re not bluffing,’ Rybachuk recalls. ‘If we don’t do a deal by 1 January, our supplies will be cut.’
²⁰

Two days before the deadline, Putin offered a solution: a Russian commercial loan worth $3.6 billion to enable Ukraine to adjust to the new price. Yushchenko turned it down. On New Year’s
Eve, Putin made another last-minute offer: a three-month price freeze if Kiev would agree to the higher price after that. Yushchenko said he would pay no more than $80. Early on New Year’s
Day, Gazprom engineers turned the taps on the pipelines entering Ukraine, and the gas stopped flowing.

It stopped flowing to Europe too. Hungary and Poland quickly saw their supplies disrupted. The export pipelines should not have been affected, but Gazprom claimed the Ukrainians were stealing
supplies from the transit routes to make up for the shortfall in its own deliveries. European governments were livid. Moscow claimed it had no choice, that it was a commercial dispute. But the West
saw it as a strong-arm tactic, retribution for Kiev’s display of independence.

The European Commission summoned ministers back from their Christmas holiday to an emergency meeting on 4 January. But before they met it was suddenly announced that the Russian and Ukrainian
presidents had reached a deal. On the face of it, the agreement was a decent compromise: Ukraine agreed to pay the market rate for Russian gas, but Gazprom would also sell it much cheaper gas from
Turkmenistan, bringing the overall price down to $95 per 1,000 cubic metres; to sugar the pill Gazprom would also pay 47 per cent more to Ukraine for transporting gas to Europe.

The West’s new worries arose because all the gas would now be sold not directly by Gazprom but by a murky Swiss-registered trading company called Rosukrenergo, which was half-owned by
Gazprom, partly owned by two shady Ukrainian businessmen. Rosukrenergo’s creation in July 2004 was overseen by Putin and ex-President Kuchma of Ukraine. Western observers could not understand
why Yushchenko had now got involved with it.

The American ambassador John Herbst recalls: ‘The Ukrainians came in and described the deal. And I was dumbfounded. My German colleague and my other European colleagues were all
dumbfounded. Because again we thought that the Ukrainians had a reasonable negotiating position and a reasonably strong one. And the result was less than optimal, to be
diplomatic.’
²¹

Damon Wilson described the consternation back in Washington: ‘Here we are with a president who presides over a deal with Russia that introduces Rosukrenergo, an intermediary with all sorts
of shady transactions and dealings, in a process that, it became increasingly clear to us, was a vehicle for facilitating side payments, facilitating the worst of business practices in Ukraine.
This was corruption at the heart of the Orange Government.’

Yushchenko’s chief of staff, Rybachuk, conceded it was a controversial deal, but they had no choice: ‘Yushchenko’s position was: Putin is president; yes I understand that gas
is a dirty business but we can’t do business with Russia in any other way.’

So now Washington and Europe found their dreams fading. The Ukrainian democrat they had championed was proving to be decidedly flaky. Wilson described it as a moment of disillusionment, of
realisation that old habits were still strong in the “new Ukraine’. And in Moscow, Putin had demonstrated his willingness to use a weapon never tried before – energy supplies.
Those few days of gas cuts in early January caused immense nervousness throughout Europe and triggered a radical rethink of the EU’s energy policies. From now on, Vladimir Putin was not a man
the West enjoyed doing business with.

8

Tempers get frayed

Now a spiral of disenchantment began to wreck relations between Washington and Moscow – and even between the ‘friends’, Bush and Putin, each of whom began to
accuse the other of bad faith. At a bad-tempered summit in the capital of Slovakia, Bratislava, in February 2005 (just after the Orange Revolution), Putin pulled a pack of 3-by-5 cards from his
inside jacket pocket – the Americans called them his ‘grievance cards’ – and began lecturing Bush about ... well, about how fed up he was being lectured to by the Americans.
The rant went something like this: We’ve done everything we can to accommodate you, we supported you in the war on terror, we closed down bases, we let you destroy the ABM treaty without
making a big fuss, we didn’t even let Iraq get between us, and what did we get in return? Nothing. You haven’t abolished Jackson-Vanik, you keep moving the goalposts on our WTO entry,
you don’t even ratify the Conventional Forces in Europe arms control treaty, you want to build a missile shield that makes us vulnerable, and you’re trying to bring all our neighbours
into NATO. Instead of praise for our policies aimed at reforming our economy and tying it into the world system, all we hear are complaints about our internal affairs – about human rights,
about our supposed ‘backsliding’ on democracy, about Chechnya, about our media, about Khodorkovsky. When will it end?

Bush’s new national security adviser, Stephen Hadley, recalled that this was ‘probably the testiest meeting the two leaders had had’.
¹
It was here that Putin tried to turn the tables on Bush by claiming that America did not have a free press – as witnessed by the fact that Bush had allegedly had CBS’s senior news
anchor Dan Rather fired for criticising him.
²
Bush tried to explain that this was not the case, but Putin was in no mood to listen. Instead, he hit back on
American democracy, too. The American people did not elect their president, Putin asserted, but an electoral college did. Bush replied: ‘Vladimir, don’t say that publicly whatever you
do. You will just show everyone you don’t understand our system at all.’

Three months later there was a chance for reconciliation. Putin invited a host of world leaders to Moscow on 9 May to celebrate the 60th anniversary of the Allies’ victory over Nazi
Germany. For the first time, an American president stood on the reviewing stand to observe a Soviet-style display of military might on Red Square. Putin appreciated the gesture (President Clinton
had boycotted a similar parade ten years earlier in protest at the first Chechen war), but he did not like what went before or after it.

On his way to Moscow Bush had stopped in Riga, the capital of Latvia, where he sided fully with the Baltic nation’s interpretation of post-war history – namely, that the liberating
Soviet army had overstayed its welcome and become an occupation force, replacing Nazi rule with another totalitarian regime. Soviet oppression in Europe, said Bush, was ‘one of the greatest
wrongs of history’. The fact that the Baltic nations perceived Soviet ‘liberation’ as occupation is a truth the Russian government finds very hard to stomach, because, it claims,
it insults the memory of Soviet servicemen who fought to free the country from the Nazis.

Even worse than his interpretation of the past was Bush’s gloss on the present. From Moscow he flew straight to Tbilisi, where the Georgians laid on a hero’s welcome and Bush
reciprocated by calling the country a ‘beacon of liberty for this region and the world’ and apparently urging other former Soviet states to follow suit. He praised Georgia for providing
troops in Afghanistan and Iraq, and proclaimed: ‘Your courage is inspiring democratic reformers and sending a message that echoes across the world – freedom will be the future of every
nation and every people on earth.’ The words caused fury in the Kremlin, which was at that very moment tightening the screws on Georgia – banning imports of its world-famous wines and
mineral waters on ‘health grounds’.