Strongman (9 page)

So Gref made his speech, as quickly as he could, while communist deputies hammered their fists on their desks and drowned him out with their chants. The vote was held, the law was passed ... and
the chamber instantly turned into a battlefield. Opposing deputies punched, kicked and head-butted each other.

‘It was a historic moment,’ Gref reminisced later with a smile. ‘That’s how we won the right to own land in Russia.’

Hands off Gazprom

The initial effect of the package of reforms was impressive. Russians did start to pay their taxes. Inflation fell from 20 per cent in 2000 to 9 per cent in 2006. The economy
grew steadily at around 6–7 per cent a year. With the help of rising world prices for oil and gas (Russia’s principal exports) the government did not just balance its books but went
into surplus. It began paying off its huge foreign debt, which amounted to 130 per cent of GDP in 1998, reducing it by 2006 to just 18 per cent.

As petrodollars poured into the exchequer, the government faced a dilemma. There was those, including Gref, the economy minister, who wanted to spend the windfall on infrastructure: roads,
railways, education and the healthcare system. Kudrin, the finance minister, on the other hand, feared that this could fuel inflation. He proposed instead the creation of a Stabilisation Fund,
which would soak up surplus liquidity and build up a substantial cushion to protect the country if the price of oil should slump in the future. Most ministers wanted money straightaway for their
industries. Regional governors complained to Putin that Kudrin was depriving the economy of cash. ‘We had hot discussions about this,’ said Gref. In the end both were satisfied. An
Investment Fund was set up, which would plough up to $3 billion into infrastructure each year. ‘It was a public–private partnership,’ said Gref. ‘If there was private money,
the state financed it. It allowed big factories, power stations and so on to be built with private money.’

But the big winner was Kudrin with his Stabilisation Fund, which reached 522 billion roubles ($18.5 billion) by the beginning of 2005, allowing Russia’s debts to the IMF ($3.3 billion) to
be paid back in full. Oil revenues continued to pour in. By August 2006 Russia had also paid back its entire Soviet-era debt of almost $40 billion to the Paris Club of foreign government creditors
– saving $7.7 billion in servicing costs. Even with these massive outlays, the Stabilisation Fund continued to accumulate as oil prices soared, giving Russia a healthy cushion to fall back on
when prices slumped during the world economic crisis of 2008.

Putin’s prime minister for most of his first presidential term was Mikhail Kasyanov, a charming, English-speaking free-marketeer with a booming voice, who oversaw the implementation of the
Gref Plan. He has since become one of Putin’s fiercest critics and a leader of the opposition. In 2008 he tried to run for president, but the Kremlin machine put paid to his plans by
discovering alleged falsifications in the two million signatures collected to back his candidature. Back in the days of the ‘Putin spring’, however, he and the president saw eye to eye
on almost everything. Even today he admits that Putin was at that time fully signed up to liberal reforms: ‘It seemed to me that Vladimir Putin and I were allies, building – maybe not
without mistakes – a democratic state with a market economy.’
⁵

Only in one major endeavour did the reformers fail – and it proved to be highly significant. Asked whether Putin interfered much in the day-to-day work of the government, Kasyanov replied:
‘In 90 per cent of cases he didn’t interfere. The other 10 per cent concerned Gazprom and almost everything connected with it.’
⁶

Gazprom was the country’s largest company, and the biggest natural gas producer in the world. Created from the former Soviet Ministry of Gas, it was privatised under Yeltsin, but the state
retained 40 per cent of the shares. It was in a parlous state, a hotbed of corruption, asset-stripping and tax-evasion.
⁷
Putin came to power vowing to sort
things out, and appointed two St Petersburg cronies – Dmitry Medvedev and Alexei Miller – as new chairman of the board and CEO respectively. Miller knew next to nothing about the gas
industry: according to Kasyanov, he spent his entire first year in the job learning. But that was only half the trouble. For the Gref team, the main problem was that Gazprom was a Soviet-era
behemoth whose grip on the entire process of exploration, extraction, distribution and sales stifled competition. The oil industry, by contrast, had been broken up into a large number of competing
companies in the 1990s.

Vladimir Milov was the young deputy energy minister who was tasked with reforming the gas sector. The idea, Milov said in an interview, was to ‘break up the monopoly, separating
distribution companies from production companies, turning them into smaller businesses, which were supposed to be privatised and compete with each other.’
⁸
Putin supported similar plans for the de-monopolisation of the electricity industry, despite protests from his own adviser, Illarionov. But Gazprom was different.

In the autumn of 2002 Milov drafted a plan for the reform of Gazprom. It won Gref’s approval, and Kasyanov’s. ‘It used to seem to a lot of people,’ says Kasyanov,
‘that splitting up the production and transport of gas could lead to the disintegration of the whole sector, which was such an important part of the country’s life-support system. They
still try to frighten people, saying that without Gazprom in its existing form, the whole of Russia would collapse. That was just scare-mongering. In fact, all competent economists and
industrialists knew that you could carry out a gas reform safely and painlessly. Everything was ready for that.’

According to Milov, the plan was sent to Gazprom’s CEO, Alexei Miller, who at once raised it directly with Putin: ‘He wrote Putin a furious memo, saying it would be disastrous and we
were threatening national security. Putin then wrote on the letter, “I basically agree with Mr Miller. Mr Kasyanov please take that into account.” ’

Milov says he expected nothing else. ‘Putin had shown a very specific interest in Gazprom since his early days. It was quite clear that he thinks of this company as one of the ultimate
attributes and sources of power.’

Kasyanov tried to present the plan three times to his cabinet, but Putin insisted that it needed more work and the prime minister should discuss it further with Miller. ‘Listen to Miller,
listen to him personally,’ he told Kasyanov. ‘Don’t listen to these people who’re egging you on.’

Finally, in 2003, Putin simply ordered Kasyanov to drop the subject. ‘Literally five minutes before the start of the cabinet meeting he called me and told me to remove the item from the
agenda.’ Gazprom, as we will see in later chapters, would become one of Putin’s most effective levers of power – in the media, economy and foreign policy.

The good life

Putin’s first term as president, largely thanks to the economic reform package, saw the first signs of growing foreign investor confidence. On the consumer side, giant
multinationals, such as the French supermarket chain Auchan and the Swedish furniture outlet IKEA, pioneered huge retail parks in the Moscow suburbs. Each new IKEA store cost $50 million to open
– but they hoped to recoup the investment quickly because, astonishingly, Muscovites seemed to have the cash to spend in them. The only thing that held back even greater investment was the
vast amount of red tape and corruption that all entrepreneurs still faced in Russia – and few foreigners had the stamina or knowhow to overcome. (Chapter 12 will look at the crushing effect
of corruption in Russia.) Still, IKEA’s huge blue and yellow furniture stores were like flags of modern life, fluttering all around the Moscow suburbs – and soon in other cities
too.

In terms of Russian psychology – to the extent that this can be gauged – the shock of the 1990s seemed to be wearing off. I had the feeling (totally subjective, I admit) that people
felt less patronised by the West than they had in the Yeltsin era. The foreign advisers were gone, and much of the new growth had a home-grown feel to it. Supermarkets filled up with Russian
produce – but not the substandard Russian produce that used to be sold, packaged in identical brown bags; now it came in shiny packaging to match Western products. Russians went back to their
old preferences – Vologda butter instead of Lurpak;
molochnaya kolbasa
(‘dairy sausage’) instead of imported German
wurst
. Wages were being paid again. The tens of
thousands who lined the streets in the early 1990s selling their possessions had vanished. Moscow was brash and vulgar, but it had a vibrancy too, with new buildings going up everywhere and
businesses opening up every day.

There were causes for optimism. The reason people were shopping at IKEA, after all, was because they were refurbishing their apartments, finally throwing out those ancient cracked tiles and
Soviet-era fittings. Only now were many people (at least in the big cities) seeing the real break with communism, after a decade of uncertainty and poverty.

By the summer of 2002 things were looking relatively good. Vladimir Putin and George W. Bush were best friends, and Putin’s team was turning Russia into a booming market economy.

But there were darker forces at work too. They threatened both Russia and its relations with the West.

4

Muzzling the media

Boris Yeltsin is rocking a baby Vladimir Putin in a cradle. The baby is wailing. Yeltsin tries to sing him to sleep.

‘Oh, oh,’ sighs Yeltsin. ‘You’re so ugly. And – God forgive me – your origins are so dark ... and your looks so ... murky ... Oh, Lord, why did I – a
democrat to the marrow – give birth to
this
?’

A fairy appears above him. It is Boris Berezovsky, the oligarch who helped bring Putin to power at the end of the 1990s. ‘Yes,’ he says, ‘your first-born were
prettier.’

Yeltsin yawns and puts his head down, saying, ‘Oh, I am so exhausted. I am going to take a well-earned rest.’ He falls asleep.

‘Poor man,’ says Berezovsky. ‘He’s worn himself out.’

Suddenly the baby starts crying out loud: ‘Wipe ’em out in the outhouse,’ he shouts. ‘All of ’em ... wipe ’em out in the toilet!’

‘Sssh,’ says Berezovsky. ‘Not all of them ... Calm down, lad. We’ll make a human out of you.’

The scene is based on a fairy tale,
Little Zaches
, by the German writer E.T.A. Hoffmann, the story of an ugly dwarf who has a spell cast on him by a fairy so that others find him
beautiful. It was just one episode in the brilliant satirical puppet show
Kukly
(Puppets) which used to be shown on the independent television channel NTV.

Putin had to endure such mockery week in week out at the start of his presidency. He hated it. The ‘wipe ’em out in the toilet’ line was, of course, a reference to his
notorious threat to annihilate Chechen terrorists. Berezovsky was the oligarch who used his television channel to ‘beautify’ Putin and paper over his KGB past to make him electable. And
the dwarf? Well, every Russian viewer understood the reference to Putin’s lack of inches.

The scriptwriter of
Kukly
was Viktor Shenderovich, an impish, bearded writer with an irrepressible sense of humour and disdain for authority. He is sure Putin never forgave them for
Little Zaches
. ‘Several people told me independently that Putin went mad after this programme.’
¹

But
Kukly
was not the only thing on NTV that offended Putin. When the channel started up under Yeltsin it quickly gained a reputation as a free-thinking outlet, which broadcast
unvarnished reports about the war in Chechnya (including the shocking truth about Russian atrocities and the demoralised state of Russian conscripts). Sunday evening’s
Itogi
, a
political chat-show hosted by the channel’s leading journalist, Yevgeny Kiselyov, was unmissable viewing for every thinking Russian.

Russian broadcasting was still in its infancy. Western traditions of balance and independence had not taken root. NTV was used quite openly by its owner Vladimir Gusinsky to further his own
interests, as was the main channel, ORT, by its prime shareholder Boris Berezovsky. They had both helped to get Yeltsin elected in 1996, when their business interests could have been threatened by
a communist comeback. But in the December 1999 Duma elections, while Berezovsky’s ORT had thrown its weight behind Putin’s Unity Party, NTV had campaigned for his rivals.

Now, two days before the presidential election in March 2000, NTV broadcast a programme that caused apoplexy in the Kremlin: an investigation into the murky circumstances surrounding the
apparent failed apartment bombing in Ryazan the previous summer and a discussion of the possible involvement of the FSB (see Chapter 1). Gusinsky’s deputy, Igor Malashenko, was told by the
information minister, Mikhail Lesin, that NTV had now ‘crossed the line and were outlaws in their eyes’.

From this moment, it seems, NTV was doomed. Gusinsky’s business empire, Media-Most, which owned NTV, was in deep financial trouble. In the 1990s it had borrowed hundreds of millions of
dollars to implement extravagant plans to extend its reach. It had even launched its own satellite, at huge expense, hoping that the emerging middle classes would soon buy NTV receivers and
programming. Gusinsky was preparing to float the company on the New York stock market, to raise capital to repay the debts. But after the August 1998 crisis, those plans evaporated, as did the TV
advertising market in Russia, and Media-Most found itself saddled with loans it could not repay. Its main creditor was the state-owned gas monopoly, Gazprom – and this gave the Kremlin great
leverage when it decided to throttle Gusinsky. According to Kiselyov, Gusinsky had been in talks with Gazprom about restructuring the debt, but when Putin became president he ordered the gas
company to demand immediate repayment of the entire debt – and, if Media-Most refused, to seize NTV’s assets. On 11 May, four days after Putin’s inauguration, dozens of armed and
masked tax police and FSB troops stormed Media-Most’s headquarters. By the end of the day they had carted out hundreds of boxes of documents, cassettes and equipment. Malashenko described the
raid as ‘purely political in character, an act of revenge and intimidation’.