Strongman (38 page)

The strategy worked. Within a couple of years almost all of the loans were repaid, as Russia swung out of the recession in rather better shape than some Western countries. GDP fell during the
crisis by 8 per cent, more than any other economy in the G20, but within a year growth had recovered to plus 5 per cent.

Sergei Guriev, a respected economist with whom President Obama had a meeting on his first visit to Moscow, says the government’s response to the crisis was ‘resolute and
effective’. ‘The Russian financial system came out of the acute financial crisis virtually unscathed, and unemployment remained under control. The government prevented the collapse of
the banking system. Moreover, the crisis did not result in major nationalisations of private companies. The government could have nationalised all banks and companies in financial distress under
the banner of fighting the crisis, but it did not.’
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Nonetheless, in the year of recession, thousands of Russian banks and businesses collapsed. Foreign investors began to flee, wiping a trillion dollars off the value of the Russian stock
exchange.

Putin himself refused to accept that the crisis revealed any structural shortcomings in Russia’s economy. He blamed it all on American recklessness and saw it as yet more proof of the
iniquity of American hegemony. ‘Everything that is happening in the economic and financial sphere has started in the United States. This is a real crisis that all of us are facing. And what
is really sad is that we see an inability to take appropriate decisions. This is no longer irresponsibility on the part of some individuals, but irresponsibility of the whole system, which as you
know had pretensions to (global) leadership.’

He went to the Davos World Economic Forum in January to deliver this message, but like Medvedev’s homily on world security after the invasion of Georgia, no one was much interested in
Putin’s recipes for the world economy. It was, after all, only days since Russia had frozen Europeans in their homes by cutting their gas supplies.

The crisis hit Russia differently from the more established Western economies. It exposed the dependency of the country on its oil exports, as the price plummeted from $145 to $35 a barrel.
Russia produces almost no manufactured goods for export – neither electronics nor clothes nor machinery – to provide more stable revenues. The crisis also laid bare the calamitous state
of much of Russia’s industrial base, inherited from the Soviet planned economy. The Soviets had created industrial zones on a scale unknown in the West – so-called
‘mono-cities’, where literally everything revolved around and depended upon a single enormous engineering plant. If you didn’t actually work at the factory, or one of its
subsidiaries or supply units, you were employed by the local government or the schools or health system, or in the shops that fed the workers. If the central plant – be it a car factory or
aluminium plant or steel works – stopped producing, then the entire network built around it would also collapse. Soviet planners did not envisage economic downturns. Now the mono-cities they
built, even if they had passed into private hands, were hopelessly vulnerable to the vicissitudes of Wall Street.

One such mono-city was at Pikalyovo, near St Petersburg. It grew up around a cement works, now a complex of three intertwined factories, one of which was owned by one of Russia’s richest
men, Oleg Deripaska. The economic crisis caused thousands to be laid off with no pay at the beginning of 2009. When the factory could not pay its bills to the local heating and power station,
supplies of hot water and heating to the entire town were cut. The population, facing a huge social crisis, took matters into their own hands. Protestors blocked the main highway leading to St
Petersburg, causing a 400-kilometre tailback of vehicles, just as Vladimir Putin was visiting his home town – inaugurating, of all things, a shiny new Nissan car assembly plant. Now there was
a full-blown crisis. At a meeting with the factory owners and government ministers in Pikalyovo on 4 June, Putin read the riot act. He ordered unpaid wages – more than 41 million roubles
– to be paid that day, and lectured the owners: ‘You made thousands of people hostages to your ambition, incompetence and greed. It’s absolutely unacceptable!’ Suddenly the
hallowed precepts of the market economy were forgotten as Putin seemed to threaten a state takeover: ‘If the owners can’t come to an agreement by themselves then no matter what, this
complex will be restarted one way or another. But if you can’t come to an agreement, then we’ll do it without you.’

In a scene that left television viewers astonished, he then demanded that the owners, whom he likened to cockroaches, sign a pledge to get the factories working again. ‘Did everybody sign
this agreement? Yes? Deripaska, have you signed? I can’t see your signature ... Come here!’ The billionaire shuffled up and meekly signed the paper, only to hear Putin snarl at him:
‘Give me back my pen!’

It was as if Leonid Brezhnev had come back to haunt Russia – the Communist Party general secretary stepping in to whip the local bosses into order. But this was 2009, almost two decades
after Russia was supposed to have espoused capitalism. Putin’s solution could only be a quick fix. In the longer term Russia had to find a way to make even the mono-cities respond to the
market.

The city of Tolyatti on the Volga, 800 kilometres southeast of Moscow, is the country’s biggest mono-city – a conurbation of 700,000 people where every fourth adult works in the
AvtoVAZ factory producing Lada cars. Shortly before the recession, in February 2008, the French manufacturer Renault bought a 25 per cent stake in AvtoVAZ for $1 billion. But like automobile makers
around the world, the company suffered badly during the crisis. Renault failed to streamline production or reduce the bloated workforce. As many as 100,000 cars were unsold. Again, the prime
minister’s instinct was to put workers’ welfare ahead of all else. The factory simply could not be allowed to fail: in a city like Tolyatti, the collapse of the dominant industry would
have catastrophic consequences for hundreds of thousands of people – and threaten the very stability of the state. On 30 March 2009 Putin visited the factory and praised its managers for not
causing massive layoffs (in contrast to Pikalyovo) and promised 25 billion roubles ($830 million) of government aid in the form of loans, cash and guarantees. Sergei Guriev describes the bail-out
of ‘this behemoth of inefficiency’ as one of the few mistakes of the crisis.

But Putin also engaged in some tough diplomacy to ensure the company’s longer-term survival. In October he issued a public ultimatum to Renault to help bail out the plant or see its 25 per
cent stake in the company reduced. ‘Either they participate in the further financing of the company or we will have to negotiate with them about our relative stakes.’ Then, on 27
November, he made a dash to Paris and got what he wanted. Renault promised to provide new technology for the factory, in return for which the government put in an extra 50 billion roubles.

It was a good couple of days in Paris for Putin. As well as the Renault success, he also supervised the signing of a deal between Gazprom and the French energy giant EDF on the latter’s
participation in the controversial South Stream project – the pipeline designed to bring Russian natural gas to Europe while bypassing ‘unreliable’ transit countries such as
Ukraine and Belarus – while the other French energy major, GDF-Suez, held talks with Putin about taking a 9 per cent share in the other bypass pipeline, Nord Stream. Both pipelines were now
making good progress: the German government and energy companies supported Nord Stream, while the Italian ENI was a partner in South Stream. The EU’s alternative, Nabucco, by contrast, was
making slow progress.

Meanwhile, at a private dinner with the French prime minister, Putin discussed something even more sensational – the purchase of a French-built Mistral amphibious assault ship, the
second-largest vessel in the French fleet, with room for helicopters, tanks, landing craft and 750 commandoes. The sale of two Mistrals was confirmed a year later, representing an unprecedented
transfer of NATO naval technology – and causing considerable unease among Russia’s East European neighbours.

The prime minister seemed to relish his job as international salesman for Russia. But he suffered one notable failure – again involving the automobile industry. In the spring of 2009 he
and the German chancellor, Angela Merkel, together supported a bid to rescue Opel, the German division of the bankrupt American manufacturer General Motors. The deal would see one of Russia’s
state-controlled banks, Sberbank, club together with a Canadian firm, Magna, to buy a 55 per cent stake in Opel and save tens of thousands of jobs, mainly in Germany. Merkel and Putin met regularly
to discuss and promote the deal. For Merkel, facing elections in September, it was politically vital, and for Putin it was another chance for Russia to get its hands on Western technology:
Sberbank’s partner in the deal was the GAZ car factory, owned by Oleg Deripaska, which stood to gain access to Opel’s latest technologies and build cars that might finally shed the
impression that Russians could only produce shoddy Ladas.

On 10 September GM agreed to the deal. Putin was jubilant. ‘I hope that this is one of the steps that will lead us to true integration into the European economy,’ he told members of
the Valdai Club at his country residence. Over the next couple of months the chairman of Sberbank, German Gref, oversaw the final negotiations, flying back and forth to GM headquarters in Detroit.
They produced a 5,000-page contract. ‘Then, one evening in early November,’ Gref recalls, ‘I happened to be in a meeting with Putin, and I was supposed to fly to Russelsheim that
evening to sign the contract the next morning. I came out of the meeting and was given a message that GM had decided not to sell Opel!’ At first, Gref thought it must be a joke. ‘The
whole deal was worked out. We’d done colossal work, getting agreement with all European governments!’

Eventually the president of GM, Frederick Henderson, called Gref to apologise and explain that it had been a decision of the board. Gref told him it might be better for them not to have a
conversation right then, because he might use language he would regret: ‘It was a short call. I was so shocked, it took me ages to recover. We had worked day and night for half a year on this
deal – with a huge team of people.’

Putin himself hit the roof. It was not just a huge blow to his hopes of reviving the Russian car industry, but also confirmation of American perfidiousness: ‘We will have to take into
account this style of dealing with partners in the future, though this scornful approach toward partners mainly affects the Europeans, not us. GM did not warn anyone, did not speak to anyone ...
despite all the agreements reached and documents signed. Well, I think it is a good lesson.’

The need to reform

The financial crisis exposed the weakness of Russia’s semi-reformed economy. You could not rely solely on a hyperactive prime minister to rush around chivvying owners to
sign pledges or foreigners to invest. The economy itself had to become more responsive, and more attractive to investors. Putin’s team of reformers understood this, and so did his president.
Medvedev’s adviser, Arkady Dvorkovich, says: ‘We had to ask ourselves, why was the Russian economy hit harder than any other? And the main conclusion we came to was that the structure
of the Russian economy just didn’t match up to modern demands and was open to far too big risks. Of course, that was obvious back in 2000 when we worked out the reforms under Putin. We
achieved some things in those eight years, but the structure of the economy didn’t change.’
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Constantly rising oil prices had helped to raise living standards, but also induced complacency with regard to economic reform. ‘When oil prices fell again in 2008,’ says Dvorkovich,
‘we realised this was not enough – we had to change direction. Medvedev decided we just couldn’t stay on the old path.’

The change in direction was signalled in an article entitled ‘Go, Russia!’, published by Medvedev in an online (of course) journal on 10 September 2009. It took him just four lines
to get to the point, condemning Russia as ‘a primitive economy based on raw materials and endemic corruption’. The more cynical Russian commentators refuse to see even a glimmer of
difference between Medvedev and Putin, but the fact is that Putin never uttered such words about the economy. The article reminded me a little of some of Mikhail Gorbachev’s reformist tracts
in the late 1980s: he too would be accused of being better on analysis than solutions, and he too found that many of his reforms were either smothered by the Old Guard or withered in the unyielding
ground of the Soviet system.

Medvedev declared that ‘20 years of tumultuous change has not spared our country from its humiliating dependence on raw materials. Our current economy still reflects the major flaw of the
Soviet system: it largely ignores individual needs. With a few exceptions domestic business does not invent or create the necessary things and technology that people need.’ Referring, it
seems to his predecessor’s reforms, Medvedev said: ‘All this proves that we did not do all we should have done in previous years. And far from all the things were done correctly.’
He promised ‘modernisation’ in almost everything: the country would hire the best specialists from around the world; there would be inward investment, modern information technologies
and even political reform – whereby parliamentary parties would periodically replace each other in power, ‘as in most democratic states’.

It read like an election manifesto – the one he might have published
before
the election rather than a year after, had there been a free election. This was the first of many such
liberal-sounding prospectuses Medvedev would deliver during his presidency, but very few of the ideas found their way into real life. Analysts argue over why. Is it because Medvedev is simply a
Putin puppet, dancing his liberal dance to entertain the West, while the puppeteer keeps a tight control of everything behind the scenes? Or is it because a real would-be reformer is thwarted at
every turn by his master? Or is the task of reforming Russia simply too great, and the system – the corruption, the sheer enormity of the task – fights back and kills every
initiative?